Hackers Highlight Investors' Need for a Back Door to Their Brokers

There's no reason for E*Trade (EGRP Quote) customers to panic over Wednesday's disruption of service by hackers.

It turned out to be little more than a costly prank. Access -- not account data -- was at risk. But the incident highlights the advantages of working with an online broker that gives you ways to bypass the Internet in an emergency: direct dial-up access to your account, good phone customer service and real-world branch offices.

Web Attacks:
TSC Message Boards.

Dialing directly from your computer into your broker's system without going through the Internet is a throwback to the technology of several years ago. E*Trade, DLJdirect, AB Watley and TD Waterhouse still offer it. Charles Schwab (SCH Quote) and Fidelity -- the two biggest brokers -- don't, says Dan Burke, an online brokerage analyst at Gomez Advisors, an e-commerce research firm in Lincoln, Mass.

What if you want to take an even lower-tech route and pick up the phone?

Virtually all online brokers offer automated phone services, but when these are overwhelmed or you simply need to speak with a human being, click-and-mortar brokers shine, says James Punishill, an online brokerage analyst with Forrester Research in Cambridge, Mass.

Merrill Lynch (MER Quote), Charles Schwab and TD Waterhouse have all serviced accounts via phone for years, giving them a head start. Schwab is known to routinely press entire operational departments into phone service in crunch times, says Punishill.

Indeed, all three firms currently rank in the top five of all online brokers for customer service in Forrester's broker ratings.

Firms like E*Trade are still scaling up their staffs of licensed phone reps, says Gomez's Burke. Fidelity, with years of experience serving millions of fund investors, is another online broker that hasn't had a problem staffing up its phone services as the number of brokerage clients grows, he says.

Several online message-board posters were underwhelmed by E*Trade's phone staff during today's crisis. One poster lamented, "As we speak, their online account access has been down for one hour. Took 25 minutes to get a 'real person' on the phone who had no explanation for the problem accept [sic] the usual 'our technicians are working on it'. No apology and a bad attitude." An E*Trade spokesman didn't return a call for comment.

Brokers like Schwab, TD Waterhouse, Fidelity and Merrill also offer the ultimate in old-school, off-line access: the brokerage office on the corner. If you absolutely, positively have to make a trade or talk to someone about your account, you can hop in the car and drive over to your virtual broker's real-world office -- if it has one.

Firms like these that offer customers "multichannel" access to their accounts don't typically offer the lowest commissions, but they look pretty good today and could keep dominating the industry.

"Today shows multichannel matters. Investors don't live and invest in one channel. On any regular day you can have a 15-minute delay accessing E*Trade. That's why Schwab, Waterhouse and Fidelity have the most customers -- because they offer any channel you want," says Punishill.

Maybe the only online investors who wouldn't benefit much from a multichannel strategy are daytraders. Time on the sidelines can be truly costly for these frequent traders.

Wednesday's problems could take some of the steam out some brokers' moves to attract the manic bunch. (For more on brokers' efforts, see TSC contributor Mark Ingebretsen's recent column.)

Daytraders typically have direct-dial access or dedicated phone lines to specialized brokerages and don't bother with standard online brokers. That has kept them far beyond hackers' harmful reach -- so far.

In any event, today's events are more evidence that the best online brokers for mainstream investors aren't always the cheapest.