Big brokers enter the arena
Online trading continues to grow in popularity, and the big Wall Street firms are jumping on board. But they aren't merely aping the Web-only outfits.
Some feared it would cut into their brokers' commissions, while others felt their customers preferred to rely on a broker for advice and trade execution, said industry analysts.
Still, a number of big
players such as Merrill Lynch, Prudential Securities, and PaineWebber have begun beta testing
online trading and plan to launch it next year.
This marks the latest change undertaken by traditional brokerages as online trading firms have gained in popularity.
The traditional brokerages that already have an online presence are adding more services to their Web sites, such as research, real-time stock quotes, account access, and portfolio management. Some firms, such as Donaldson Lufkin & Jenrette, have created a separate unit to handle online trading, while others are looking for ways to integrate Net trading into their existing businesses.
These efforts come as full-service brokerages fight to retain their customers and capture what analysts call the "middle ground." That market consists of investors who fall between those solely looking for a brokerage with the cheapest trading price and those who want their broker to provide full investment advice.
Online firms such as DLJdirect report that the bulk of their new customers are coming from full-service firms, compared to discount brokerages as in the past.
"We want to retain as much of a client's assets as possible," said Lauren Mascitelli, a marketing director for PaineWebber. "If you don't have these online services, potential customers will screen you out, so you have to have something in place."
Mascitelli said her firm plans to integrate online trading into its
proprietary online service, PaineWebber Edge. Customers now
pay a
flat fee based on the percentage of assets that PaineWebber manages. Once
online trading is added, customers will pay the same fee whether they
execute the trade or the broker handles it.
This "wrapped-in" fee structure is similar to one under consideration by other brokerages.
Merrill Lynch is beta testing online trading for its fee-based Merrill Lynch Financial Advantage and Merrill Lynch Asset Power programs. In the two programs, customers will receive 52 trades with or without the assistance of a broker and pay an additional cost for any trade beyond that.
Prudential Securities is also beta testing an online trading system, PruTrade, with 250 customers. Investors pay the same commission as they would going through a Prudential broker. But the firm is also considering switching the pricing so that it is based on a percentage of assets under management, said Murali Balasubramanian, Prudential Securities manager of strategic client initiatives.
"Being a full-service firm, we have to find a way to price the trades in a way that fits our full-service model," Balasubramanian said. "It's critical that we keep the financial advisor at the center of all this. It will be the financial advisor that will offer this service to their client."
Low commissions charged by online trading firms have prompted full-service firms to start steering away from commission-based pricing and move toward management fee-based pricing, said Bill Burnham, an analyst with Credit Suisse First Boston.
Despite the swing toward more online trading,
traditional brokerage firms say their retail brokers, or financial advisors, are far from becoming extinct.
As online trading multiplies, full-service firms have begun to stress the strength of their brokers' advice and research departments, analysts said.
"It's really driven home that what [traditional brokerages] bring to the table, which online trading firms don't: the advice and analysis," said Burnham.
Added Frank Zammataro, director of Merrill Lynch Online: "Traditional firms have primarily based their business with [the financial consultant] approach and are now embracing technology to help. The online discounters have focused on the technology and are now embracing the people approach. Both are converging. We're seeing advice and guidance from consultants also embodied with interactive accounts."
PaineWebber's Mascitelli, along with the other traditional brokers, believe they have an edge in the long run.
"It's harder for online brokerages to add a force of human advisors and
intellectual capital [in the form of a research department] than it is for
traditional brokers to add applications," Mascitelli said.
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