Online Brokers Roll Out Perks Like Red Carpets

Win or lose, some online brokers shower active traders with perks like they're high rollers in Vegas.

Online traders generate the revenues that sustain online brokers. The brokers take in more money, in part, if they win more customers or if their cusotmers are more active. Last quarter, online trading jumped 125% from the year-ago quarter to about 336,700 trades a day. Online trades represented about 30% of retail trades at the end of 1998 and about one out of every seven equity trades, according to reports by Piper Jaffray and Credit Suisse First Boston.

So like casinos charming their fervent customers, some brokers such as E*Trade (EGRP), Toronto Dominion (TD) unit Waterhouse and Charles Schwab (SCH) offer special services aimed at active traders. Some wonder if these benefits -- such as priority access to IPOs, dedicated customer service or free research and charts -- cross the line from rewarding good customers to encouraging active trading.

Tailoring services to particular investing styles or offering benefits to certain customers isn't unusual. It's common practice in the full-service industry to give active traders discounts on commissions and offer accounts designed for active traders. But full-service brokers deal with experienced and wealthy investors, unlike the smaller, newer investors who are common online. And at full-service firms, perks are often determined by asset size rather than trading activity. In contrast, at several online brokers, the trades determine the benefits.

For example, at Merrill Lynch (MER) clients who trade actively are directed to fee-based Asset Power accounts. As account assets rise, the annual fee declines and the number of free trades included grows -- from 52 trades a year to 204 trades for clients with $10 million in assets and up. PaineWebber (PWJ) offers Premier Asset accounts in which an annual fee is levied based on assets and the number of trades, with 192 trades a year allowed for clients with assets from $3 to $5 million. And trades above the allotted amount are executed at a discount to traditional commissions.

Online brokers are just beginning to establish a range of specialized services in the brokerage tradition. Fidelity, the No. 5 broker in terms of online transactions, has a variety of accounts, some of which can include discounts for active traders. Some, including Donaldson Lufkin Jenrette (DLJ) unit and No. 7 broker DLJdirect, offer benefits to high-asset customers. But in the midst of stock volatility and a flood of novice investors, there is growing concern about online investors' zeal for trading in and out of stocks quickly.

"Some of these products are designed to encourage people to be more active traders," says Marc Beauchamp, a spokesman for the North American Securities Administrators Association, an organization of securities regulators. "But all the studies I've read show that real wealth is still made the old-fashioned way, which is to buy quality and hold for the long term."

Marvin Steinberg, a counselor for compulsive gamblers and an authority on stock-trading addiction, compares special services aimed at active traders to incentives offered to slot-machine players at casinos. Some casinos award points for the amount of time a person spends playing slot machines, regardless or whether they win, and offer gifts for those points.

"You're getting something by being in action, whether online or at a slot machine," Steinberg says. While incentives are common in business -- just look at frequent flyer miles -- racking up stock trades can produce big losses, not just jet lag.

But online brokers say their active-trader services don't change people's trading habits, just respond to their needs.

"When we developed our Power E*Trade program, we tried to look at what was going to give people who were already active traders more value, as opposed to giving people a reason to trade more," says E*Trade spokeswoman Lisa Nash. E*Trade, the No. 3 online broker and one of several that promotes such services, claims Power E*Trade to be worth as much as $3,000 a year.

E*Trade introduced its Power E*Trade services in November. Customers who trade 30 times or more during a quarter can receive benefits such as faster order entry, priority customer service and research recommendations before the market opens. Those who trade 75 times or more during a quarter (about once a day) can receive additional perks such as real-time Nasdaq Level II quotes, real-time streaming charts and preferred access to subscribe to IPOs at the offering price.

Schwab, the No. 1 online broker, offers three levels of Schwab Signature services. At the low end, which just debuted this week, 12 trades a year or $100,000 in assets qualifies a customer for priority phone access, higher quality research and tools. At the high end, for 48 trades a year or $1 million in assets, a customer receives personal service from a team of investment specialists, access to conference calls with company chief executives and better research and information.

Waterhouse, the No. 2 broker, is rolling out its active investor services in response to customer demand. Traders who make at least 24 trades a year and have $50,000 in their account receive discounts on commissions, better margin rates and additional research sources, among other benefits. (Two other top online brokers, Datek and Ameritrade (AMTD), the No. 4 and No. 6 brokers respectively, say they do not have any special programs.)

The three online brokers say active traders need special services that long-term investors don't. Unless a customer trades frequently, they argue, the services aren't very useful. "I would be shocked if a program like this would entice people to trade more," says Jamie Moldafsky, senior vice president of segment marketing at Schwab.

And online traders are pretty eager to trade. The average Merrill Lynch client trades on average six times per year. The average E*Trade customer trades 15.4 times a year, based on the second half of 1998, according to Piper Jaffray. And that number puts E*Trade in the middle of the online broker pack.

Online brokers say their programs are intended to keep active traders on board, win active customers from other brokers and encourage current customers with accounts elsewhere to consolidate their trading. And indeed, active trading may not always be the best thing for a broker. If a customer trades her account down to zero, the broker loses, too.

As brokers clamp down on risky margin-lending activity and try to educate customers about investing, the active trader services may send a mixed message to customers.

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