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E*Trade makes deal to add financial planning services

The online brokerage is set to offer financial planning services to its customers early this year in partnership with DirectAdvice.com.

Online brokerage E*Trade is set to offer financial planning services to its customers early this year in partnership with DirectAdvice.com, the companies announced today.

Under the marketing deal, E*Trade customers can log on to the Web site and receive online instruction on a range of financial planning issues. The proprietary system developed by Hartford, Conn.-based DirectAdvice.com offers customers advice on how to invest savings, buy a house or save for retirement.

E*Trade's move comes as many online brokerages look to expand their services to compete in the growing online market. Powerhouses Merrill Lynch, Morgan Stanley Dean Witter and PaineWebber, which all launched Web sites last year, have become significant threats to the already established Internet players, such as E*Trade, Charles Schwab and Ameritrade Holding.

Analysts contend that for these online brokers to lure new customers, they must provide added services, such as online banking, lending and financial planning.

"It's pretty much a general practice now for most major online brokers to offer financial planning," said Michael Overly, an attorney with Foley & Lardner. "There are number of companies out there that provide information so customers can perform calculations to their own portfolios."

By moving into financial planning services, brokerages have turned into financial advisers, something the Securities and Exchange Commission has traditionally tried to prevent. The SEC, fearing that these broker-advisers could influence investments, in 1940 adopted the Advisers Act, which set strict guidelines on who could dispense advice.

Since the advent of the Internet, however, the number of households that trade online has exploded, and more consumers are seeking information online and choosing to trade without an adviser. As a result, the SEC fears that too many inexperienced investors are making trades without realistic financial goals.

"There are a number of companies out there that provide information so customers can perform calculations to their own portfolios," Overly said. "This is a justifiable concern: You have fairly inexperienced investors who have access to lots of information, but there is no human adviser to put the information in context."

As a result, the SEC has recognized the need to let online brokerages offer some investment guidance. It is now considering a proposal that would allow brokers to give investment advice provided they follow certain rules, according to SEC attorney Cynthia M. Fornelli.

"They realize that this is how business is going to be done, and that it's unavoidable," Overly said.

A broker has two main responsibilities before giving advice, Fornelli said: It has to ensure that the customer is aware of its role as adviser and broker, and it must get the investor's permission before making any trades.