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Online brokerages: grow or wither?

Web users have been signing up in droves with online brokerages, but analysts warn that they also will be quick to stop trading if the market sours, leaving some brokerages floundering.

Web users have been signing up in droves with online brokerages, but analysts warn that they also will be quick to stop trading if the market sours, leaving some brokerages floundering.

Online brokerages that depend on discounted fees per trade are particularly at risk in this case. The key to their success will be to build their assets and broaden their offerings with such services as financial and estate planning, mutual funds, and credit cards--allowing the firm to earn fees by managing the funds.

"Brokers that insist on catering to [people who trade stocks daily or weekly] are going to be fighting for a smaller and smaller market--not just market share," said Chris Musto, an analyst at Gomez Advisors. Musto added that the sector is likely to undergo major consolidation and a shake-up.

In a bid to keep its most profitable customers happy and to attract new clients willing to pay a little extra for service, Charles Schwab earlier this month mailed out software that allows its customers to make faster trades. The software, known as Velocity, will allow traders to access stock quotes more quickly as well as other services.

E*Trade, though still considered a discount online trading firm, is now offering a range of services from banking to credit cards. As a result, its accounts have increased to 1.2 million customers in the third quarter with $25.8 billion in assets.

"Even in this bull market, it is important to continue building assets and accounts," said Timothy Klein, an analyst at investment banking firm Piper Jaffray. "While trades come and go, hopefully assets hang around and provide a more stable base of revenues."

According to a new study released today by research firm Jupiter Communications, the number of trading households is expected to grow to more than 20.3 million in 2003 from 4.3 million in 1998. Still, the number of actual trades and commissions per household is expected to drop, leaving brokers dependent on revenues from interest, fees, and other services.

By 2003, the Jupiter study reports that these services will represent 80 percent of total online brokerage revenue, up from 36 percent of the total in 1998.

But these services cost money, analysts say.

"It's not cheap to have brokers on call," said Jupiter Research analyst Robert Sterling. "It's difficult to pay the cost to have real estate, financial and estate planning, and mortgage experts on call."

Many Net users are choosing to trade with Web brokers instead of the full-service brokerage houses because of the lower fees. Datek Online, AmeriTrade, Waterhouse WebBroker are among those that offer deep-discounts for online trading, charging respectively $9.99, $13, and $12 commission per trade up to a certain number of stocks traded. Other companies such as Charles Schwab, Fidelity Brokerage, and E*Trade charge higher fees. Schwab charges $29.95, E*Trade $19.95, and Fidelity charges $14.95.

Over the past several quarters, Schwab's accounts and assets have increased significantly. During the second quarter, the company reported 2.8 million active accounts with $251.3 billion in assets, up from 2.5 million accounts with $219 billion in assets in the first quarter. Schwab collected $180 million in the second quarter with mutual fund service fees, up $43 million, or 32 percent, from the year-ago quarter.

E*Trade's average customer money market fund balance increased 138 percent to $3.8 billion in the third quarter.

According to the Jupiter study, the online brokerage market will lead the financial services sector in growth, raising its asset pool to more than $3 trillion by 2003, a sevenfold increase from the $415 billion in 1998.