NEW YORK (
) -- If the
is truly dead, then the discount brokers should be positively giddy.
From instant reports of the latest unemployment numbers to live video of Congressional hearings, investors these days have greater access to information ever before, not to mention the ability to execute their own trades in real time, and see live stock quotes almost anywhere via mobile devices.
The discount brokers, including public companies like
as well as private players like
, would seem to have a great opportunity to amass customers right now. The financial crisis has shook the faith of the average investor in the long-term righteousness of the stock market, and the next generation is only going to be more tech-savvy, better equipped to stay engaged with the direction of daily trading and actively manage positions. They will also be less willing to pay hefty commissions for advice.
Jay Pestrichelli, TD Ameritrade's Managing Director of Client Experience
"There is no question the old buy-and-forget it is dead. ... Especially with the clients that would utilize a firm like TD Ameritrade," says Jay Pestrichelli, TD Ameritrade's managing director of client experience. "We are seeing significant change and the amount of time that a client will hold a position and the quick reaction they make to market changes."
The May 6 "flash crash," which sent the Dow Industrials Average down 1,000 points briefly that day, was TD Ameritrade's "busiest day ever," Pestrichelli added.
"We have seen trends where people are taking more and more control," with significant assets coming in from the full service brokers, he added.
David Twibell, president of Colorado Capital Bank, a wealth management firm based in Denver, agrees that investors have a much shorter time frame than they did from 10 years ago, but if they wanted to make real returns on their portfolios, they do not have a choice.
"Through most of the '80s and '90s, buy-and-hold was the best strategy to employ because the risk was that you weren't going to be in the market," Twibell says. "For the last decade that's been a horrible strategy. The markets haven't provided you with much if any returns from 2000-2010. The markets basically returned nothing. And if you had a passive approach, you didn't do particularly well."
Twibell continues: "Right now it's an environment that's incredibly frustrating for any investor, but a particularly tough environment for people who continue to adopt the buy-and-hold approach."
The Impact to Online Discount Brokerages
On the one hand, some investors who have managed portfolios that haven't done well in the downturn are indeed looking for help. Some have even left the market altogether because of distrust.
But online brokers, struggling in recent years to expand from mere discount firms to so-called asset gatherers to seize on the retirement planning trend, have a chance to show their feathers during this generational shift, says Adam Sussman, director of research at TABB Group.
"In the long run there are things that the brokers can do to help drive business, which is really to help folks understand what their individual risk exposure is and try to help folks intelligently allocate their investments based on the individual's own profile," Sussman says. "That's something that's still largely handled by financial advisors. But there are ways that that could be automated and done purely online that would attract some of the younger generation that's more used to doing that stuff online."
TD Ameritrade's Pestrichelli says clients are looking for more engaged experiences from the online brokers, including education, strong technology and a level of trust. "If you're not meeting their need they'll find some other place to go," he says.
Online brokers are already automating personalized online asset allocation and using social networking functionality in order to spark more community-based conversations to share information differently, such as Twitter, observers say.
Facebook page is updated periodically with statuses such as "Are you a candidate for long-term care insurance?" and "Learn about the effects of high unemployment on the stock market." The status updates are then linked to articles with related content. E*Trade is likely hoping that younger consumers, who spend hours on social networking sites such as Facebook, will be attracted and turn into customers.
Bank of America
plans to launch an improved version of its existing online brokerage to attract new and younger investors as part of the Merrill Lynch platform, according to Sandler O'Neill analyst Rich Repetto, citing a
Wall Street Journal
article last week.
Dubbed Merrill Edge, the platform will offer trading at $8.95 per trade, lower than E*Trade and TD Ameritrade and about equal to Schwab. Fidelity is the only broker that has a lower commission price of $7.95 per trade of the largest online firms. Customers will also have access to their other accounts and products with Bank of America Merrill Lynch.
Merrill Edge will also offer mobile and telephone access as well as the ability to access accounts through Bank of America branches. Bank of America's existing online brokerage customers will be transferred to the new program, according to the
But Sandler's Repetto, in a research note last week, expressed skepticism over the success of the new platform.
"Merrill is launching its online brokerage offering because they are still losing small accounts to the pure-play online brokers," he wrote.
A telltale sign of an online broker's success is daily average revenue trades, or DARTs. For the most part, industry DARTs have been falling this year as market volatility retreated from the highs of last summer. Activity surged around the time of the "flash crash" but has since settled down, analysts say.
The move into providing more asset management, retirement and even banking services looks like the right one, but commission trading is still their main source of revenue so the online brokers will need to figure out how to encourage frequent trading no matter what the market conditions.
So far, heavy discounting has been the method of choice, but it's difficult to see transaction charges heading much lower than they are now. That's why encouraging market awareness and active portfolio management, by making it access seamless and trading cost-effective, looks like the way to go. Call it buy-and-sell-and-buy again.
"Staying connected is key," TD Ameritrade's Pestrichelli says. "This is just the beginning of this trend."
--Written by Laurie Kulikowski in New York.