Facing falling trading volumes and seeking to increase the assets held in its customers' accounts, the online brokerage firm
( EGRP) announced an agreement with
Ernst & Young
Tuesday to offer financial planning advice for online investors.
E*Trade and Ernst & Young, the third-largest accounting and consulting firm, will each contribute $25 million to create a new company. Officials for both firms said the as-yet-unnamed venture would begin providing electronic delivery of financial advice by the end of the year.
E*Trade has been "extremely successful at acquiring accounts," said Gregory Smith, analyst for
. "The challenge is for more people to take their E*Trade accounts more seriously. The challenge is to get people to bring more of their assets to E*Trade." Smith rates the stocks of E*Trade and its competitor
( SCH) a buy. His firm co-managed E*Trade's initial public offering and a bond offering.
At first, the service will be tailored to the needs of E*Trade investors, requiring no minimum account balance. The cost to customers will likely be higher for more complicated or personalized service, including direct access to Ernst & Young's staff, company officials said. But a price structure has not been determined, and the product may be sold through channels other than E*Trade.
E*Trade, which among brokerages attracts the lowest average percentage of its clients' investment assets, needs the deal to compete with conventional brokerage firms' online offerings, as well as with Schwab, the largest discount and online brokerage firm, which directs customers to around 5,800 affiliated financial planners.
At the end of March, the average Schwab account had $112,892, while the average E*Trade account held around $25,379, or around 25% of the average customer's investment portfolio. Schwab's customers had $725 billion at the firm at the end of 1999, of which $213 billion was managed by advisers to online customers.
In 1999, Schwab referred to financial planners 16,700 customers with more than $100,000 in their accounts. Once the assets are under an adviser's care, the customer pays 1% of their average daily value to the adviser. In return, the advisers direct trades to Schwab. In E*Trade's deal, many of those details are as yet unset.
"In order to succeed, they definitely need to increase the asset level, and that will increase the revenues," said Richard Repetto, analyst for
. The need to diversify revenue sources is especially pressing, he said, "when you're totally tied to transactions and the volume gets low, as it is doing right now." Repetto rates E*Trade shares outperform and Schwab shares neutral. His firm has done underwriting for neither company.
Trading volumes on the
New York Stock Exchange
this month fell 15% from April, while
trading volumes fell 25%. The firm
Credit Suisse First Boston
predicts quarterly declines of 10% to 20% in trading volume for online brokers. As investors have learned of the falling trading volumes, the online brokerages' stock prices have fallen 15%, according to that firm.
The new company's product will be "an experience unique to each customer," said Beth Brooke, vice chair for strategy and corporate development for Ernst & Young. Customers would first view online advice pertaining to their financial status and upcoming events in their lives, such as sending children to college or buying a home. "Depending on complexity, they'd be able to triage their way into a face-to-face with an investment adviser."
She said Ernst & Young's entire network of around 1,000 advisers would be made available.
The accounting firm would retain its high-end brand status by continuing to charge additional fees to E*Trade clients who sought more personal advice, she said. Still, all E*Trade clients will likely be offered the basic service, said Amy Errett, E*Trade's chief asset gathering officer.
"It wouldn't be our style to preclude anybody in our customer base from using a service like this," she said.
Ernst & Young would offer advice that provides an array of suggestions and avoids simply directing clients to make more E*Trade transactions, officials from both companies said. The advice must be given under the standards required of registered investment advisers, they noted.
Company officials speculated that the new service may be sold to other clients, such as regional investment bank customers. But it was unclear how the joint venture will avoid appearances of conflicting interests as it directs E*Trade customers to Ernst & Young advisers, who would presumably provide advice on trading activity.
"We have not yet worked out all the specifics," Errett said. "Our style would be very much to let the customer mandate that."