As online brokerage houses struggle with slumping trading volumes that have bottomed their bottom lines, data released Thursday by IDC found that the key to the sector’s future success lies in tailoring products to meet the needs of a diverse customer base.
“Simply becoming the one-stop purveyor of various financial accounts won’t necessarily enable a brokerage to gain an unbreakable tie with its customer,” said the study.
Although many Internet brokerages saw their numbers swell during last year’s stock market heyday, the broad swath of investors jumping on the trading bandwagon resulted in a highly fragmented customer pool.
Accordingly, IDC advised brokerages to take a targeted, something-for-everyone approach by expanding their range of offerings, such as aggregating individuals’ multiple accounts, as well as supplying investment advice and banking services.
As part of its survey of more than 3,000 U.S. consumers who manage their household investments, IDC estimated that the average number of trades per online brokerage customer in 2000 was 17.5. However, one-third of all online traders make five or fewer trades annually.
Active traders, or those who conduct 50 or more transactions per year, are representative of only 7 percent of the online brokerage customer base, the study said.
As a result of these divergent figures, IDC concluded that assessing the frequency of customer log-on activity to their brokerage accounts provides a stronger gauge of interest in the markets and portfolio holdings than simply tracking their number of trades. More than half of all online account holders check their assets at least weekly, said the study.
“As brokerages provide appropriate customization tools for those who want to touch their accounts frequently, they will cement stronger links with their customers,” IDC said.
Bank on It
Online brokerages can diversify their product offerings and revenue streams by providing banking services and financial advice, IDC said.
“Although online brokerage accounts originally touted the ‘do-it-yourself’ philosophy, many are adding professional advisor advice to the mix,” said the study.
The strategy seems to be paying off, with IDC reporting that 59 percent of online brokerage account holders said they use such advice. Moreover, the research firm said that Internet traders show a greater propensity to utilize other online financial products, including online banking.
These findings could bode well for a handful of the largest Internet brokerages, which have aggressively worked to move into other segments of the banking industry in recent months. Earlier this week, Net brokerage E*Trade (Nasdaq: ET) launched a mortgage service while competitor Ameritrade (Nasdaq: AMTD) announced it was adding pre-market trading and a portfolio service. E*Trade’s move followed its recent acquisition of online mortgage originator LoansDirect.
All Access Pass
IDC also said that online brokerages can improve the user experience by allowing customers to aggregate multiple accounts. Since brokerage households have an average of three accounts, the study advised institutions to provide a single log-on gateway to all accounts, as well as the means by which users can transparently handle fund transfers and purchases of different types of products.
Moreover, IDC concluded that brokerages need to beef up the resource data supplied on their sites. Currently, less than one-quarter of trading households use their broker’s Web site as the primary source of information on their investments, said the report.
“Given the high percentage of advice seekers in the online brokerage customer base, a simple aggregation capability is not enough,” said IDC analyst Shaw Lively. “Winners at aggregation will incorporate the delivery of advice based on the data available from aggregation engines.”