Shakeout Time for Internet Brokerages – Part I

Not only has there been a dramatic drop in new accounts opened at online brokerages, but trading volumes are way down as well. Major players are cutting staff and reporting losses.

Mirroring the dot-com shakeout, the Internetbrokerage sector may be heading into a shakeout of its own.

“The downturn in the market has been a double whammy for the online brokerage firms,” Chuck Callan, head of the North American financial services practice at the Boston Consulting Group (BCG), told the E-Commerce Times.

“On the one hand, they have lost some of their cache as pure plays and on the other hand, they are suffering from the effect of lower trading volumes and lower revenue streams from balances and margin accounts,” Callan said. “Both of those phenomenon are reflected in the current valuations of online brokerages.”

A number of factors — from improving spending choices to increasing the revenue yield per client — figure to determine which of the brokers will be left standing when the shaking is over.

In this first part of a two-part series, the E-Commerce Times explores the difficult, sometimes contradictory customer expectations that online brokerages must satisfy. In Part II, to be published shortly, the spending and revenue-boosting strategies of Net brokerages will be detailed.

Know Thy Customer

The problem Internet brokerages face is that for some investors, the online channel is not attractive, while for others, self-directed trading on the Web is the only way to go — without loyalty to any single online brokerage.

Indeed, according to a survey conducted by Forrester Research, online brokerages are in a tight race when it comes to satisfying customers. The research firm said that after analyzing the leading Internet brokerages, the customer satisfaction rankings were “so tight” that less than a point separated the top firm, TD Waterhouse, from the last-place firm, E*Trade.

Cheap trades, a retirement planner and free unlimited quotes boosted TD Waterhouse to the top of Forrester’s rankings overall, with a score of 59.12. Rounding out the top Internet brokerage firms were Charles Schwab at 58.63, CSFBdirect at 58.47, Ameritrade at 58.20 and Datek Online at 57.97.

Different Strokes

Forrester senior analyst Kenneth Clemmer told the E-Commerce Times that there is little that brokers can do to “differentiate themselves” on the Internet.

“There are price differences and concomitant service differences as well,” Clemmer said. “But if you are looking at the top online brokerages, they all have more or less the same fundamentals.”

Added Clemmer: “One may have one or two widgets that the other doesn’t, but the online channel is about getting it done. Making the trade and then getting out.”

Too Much?

If online brokerages try to migrate to a full-service model, they risk going too far — forgetting what was initially attractive about the online trading model.

Clemmer thinks that spending on the development of a full-service business model online can backfire. The analyst points to the example of online brokerage firm SureTrade, which was recently folded into Quick & Reilly.

“Q&R is now going out with the message that they have advisors and financial planning services,” Clemmer said. “They are trying to pound the round SureTrade customers into the square hole of Q&R.”

As a result, according to Clemmer, SureTrade customers are being provided a great deal of unwanted services.

“What that means is that Ameritrade and Datek are the only online brokers in the less than US$10 per trade market,” Clemmer said. “So I think you are going to see a lot of SureTrade customers fleeing Q&R and heading over to what Ameritrade and Datek are offering.”

Full-Service or Drive-Thru?

At the same time, other observers say that online brokerages do need to offer a broader range of services to separate themselves from the pack.

“It is important for the online companies to figure out how they will migrate upstream and provide wealth management services — being able to work with clients directly to develop financial strategies and retirement and tax planning,” BCG’s Callan said.

Ultimately, with so many players in a tight race, consolidation — if not contraction — is likely. Thus, even though there may be little to separate the different online brokers, what little separation there is could make the difference between dot-com success and failure.

“Online brokerages are not going to grow their businesses by cutting costs,” Callan said. “They have to continue to innovate their offering. In some cases, that means becoming more full service.”

Please see Part II.

2 Comments

  • In the comment:

    “What that means is that Ameritrade and Datek are the only online brokers in the less than US$10 per trade market,” Clemmer said. “So I think you are going to see a lot of SureTrade customers fleeing Credit Suisse and heading over to what Ameritrade and Datek are offering.”

    What about Scottrade at $7.00 per trade?

  • Elizabeth,

    You forgot to mention one on-line trading company, or should I say that Mr. Clemmer didn’t mention such, in that, …”What that means is that Ameritrade and Datek are the only online brokers in the less than US$10 per trade market,”… this is not true. At the very least I disagree.

    Senior analyst Kenneth Clemmer told the E-Commerce Times that there is little that brokers can do to “differentiate themselves” on the Internet. Again, I do not beleive that. Case in point. Take a look at Scottrade’ real-time streaming quote system (www.scottrade.com) using an eloquent java based front-end that provides fast executions, charts, low commissions ($7.00 w/o assistance on market orders – unlimited shares) and over 120 offices nationwide to serve it’s customers. They have been in business since 1980 for heavens sake. I’m curious to know why Mr. Clemmer failed to mention this brokerage firm.

    The higher it seems you go in the food chain of ‘Market Analysts’ the less they seem to understand about their own business. A rather biased opinion on my part, but one I also see and hold true in other businesses as well (ex. the telecomm industry). Food for thought…

    pardon the pun.

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