Serve or Volley

Publish date:

In the online brokerage business, there's a widespread belief that customers rarely leave, no matter how bad the service. Changing Web brokerages is just too headache-filled, complicated and time-consuming.

But anecdotal evidence is emerging that trouble-plagued customers do indeed change brokers, or at least scale back their accounts and open new ones elsewhere. The issue is important because it runs to the heart of a bigger debate in the online brokerage industry: What's more important in the pursuit of growth, marketing or technology and service?

One group, including analysts Scott Appleby at

ABN Amro

and Jim Marks at

Deutsche Bank

, says marketing is key because once a broker lands a customer the hassles involved in leaving will work toward retention.

Plenty of online brokers are betting that marketing is the key, too, because they're willing to see their earnings slashed to finance expensive ad campaigns. This fall is seeing massive spending by





(AMTD) - Get Report


Discover Brokerage Direct

, a

Morgan Stanley Dean Witter


unit, among others.

Meanwhile, another group, including Blake Darcy,


chief executive, says customers are switching brokers to find better service. Darcy says word of mouth is the top source of customers for his firm, a unit of

Donaldson Lufkin & Jenrette



And customers continue to complain about service. Emails to

from online traders show that tech problems do cause them to switch brokers. Dissatisfied traders often don't close accounts with blundering brokers, though: They simply shift the bulk of their assets to brokers they think do a better job.

Still, there's ample support for the sedentary view of online traders. Ameritrade has suffered technology problems for months, but has some of the strongest transaction and account growth of the top brokers. Analysts peg its retention rate at 90%. In the quarter ended in June, Ameritrade added 57,000 new accounts and lost 7,000, bringing total accounts to 267,000.

And customers say they've had trouble closing, or trying to close, accounts and can be intimidated by the process.

"As of yet, I have not closed my account with


," wrote Lyn Harvey in an email to


. "I have requested to have forms to close out this account on four different occasions. I did finally get the forms to close out my accounts."

Closing an account and transferring assets can be costly and time-consuming and require filling out forms or making phone calls, several brokers say. Fees, procedures and services vary.

One thing that makes it hard to move is that customers can't trade open positions while they're being transferred. Another is that brokers often have different rules about what securities they accept. And if the type of account is changing as well, that can require further opportunity for confusion.

But in the face of these forces pushing people to stick with their brokers, customers are finding ways to escape unsatisfactory service.

As traders become more sophisticated, more are opening multiple accounts to compare services and to use as backups. And Internet message boards and broker rating reports online and in print help even less-savvy Web-surfers find brokers that might suit their needs.

"I use Fidelity OnLine and DLJDirect," wrote Ron Walker in an email to


. "Fidelity has a wealth of resources but underpowers its Web site for online, retail traders, whereas DLJDirect is more limited in its scope but lean, mean and fast."

Once traders have more than one account, they may choose to close the one they like least -- a simple process if it only contains a bit of cash. Customers can close accounts with a phone call at some brokers. But some customers choose not to close accounts they no longer trade in because an open account is cheap to maintain and provides access to the broker's research, news and tools. It also provides a convenient backup.

Unless the broker is solely concerned with account growth, those accounts won't look very good on its records, says analyst Michael Chung at

Williams Capital

. Multiple accounts are tough to track. And depending on how a broker defines an active account, inert secondary or backup accounts may falsely figure into account statistics for many months. They will bring down both a broker's transaction activity and assets per account -- key indicators of the health of its accounts. That means more attention may turn to just how sticky online accounts actually are.