getting the word out: The discount-brokerage business may be fine for some full-service firms, but it isn't for Salomon Smith Barney.
The full-service brokerage unit of
isn't making plans to offer cheap online trades, unlike Wall Street rivals
. Instead, during the first quarter the company's brokers will start sending customers to Citibank's discount-brokerage service,
, which charges $20 for most trades.
Instead of facing the cannibalization issue head-on, as other traditional brokerage firms have done, Solly is leveraging its role as part of a financial services conglomerate to keep its customers -- and its 11,000 brokers -- happy.
Separate but Equal
Cheap online trading has revolutionized the brokerage business. Even full-service firms that initially eschewed the business, such as Merrill, have begun offering $30 online trades next to their full-service offerings, which carry a price tag of a couple hundred dollars apiece. With more than 5 million online accounts in the U.S., full-service firms have had to come up with ways to try to keep clients, and their assets, in-house. And most have come to the conclusion that a low price, in addition to Internet access, is the way to do that.
But not Solly. In October the brokerage house began allowing customers to trade online through fee-based or regular commission accounts, but that's as far as the craziness goes. There is no discounted trading, nor are there any plans for eventual discounted trading at Solly.
The idea, says spokeswoman Sally Cates, is to maintain two separate brands: Salomon Smith Barney for full-service trading, and Citibank Direct Access for lower-cost trading. Later in 2000 the financial services behemoth that includes
, Citicorp and Salomon Smith Barney will follow up with consolidated account and tax statements, Cates says.
The separate brands, according to one hedge fund principal, should stem the flow of accounts to the cheap online brokerages that have sprung up and grabbed more than 30% of retail trading volume.
"Rather than losing clients to the
, they're trying to maintain a relationship with those who want to do business on a discount basis with the hopes that they can maintain a relationship and maybe do some additional business going forward," says Frank Barkocy, a senior analyst at hedge fund
, which is long Citigroup.
From an earnings point of view, Barkocy isn't expecting the move to mean much, but having a cogent Internet strategy will be important down the road for retaining clients and selling additional products and services, he says. Indeed, a large part of Citigroup's revenue comes from its consumer retail business.
Getting That Promotion
The online brokerages haven't suffered much from the new competition on the Internet from the big Wall Street firms, according to Stephen Franco, an online brokerage analyst at
U.S. Bancorp Piper Jaffray
. In part, that's because getting customers online requires that the brokers actually promote the discounted products. Depending on how each firm is set up, moving business to any discounted service can hurt brokers' individual compensation.
It probably will be another six months before there are any signs of whether Merrill's fee-based and discount business -- which has come online in the last six months -- has helped it hold onto customers.
"I'll be very interested to see how much the full-service brokers promote the discount products. It goes against everything they've been saying for 20 years," Franco says.