If I were a full-service broker struggling with the roar of the online revolution, I know what I would do today: I would give away trading in return for keeping assets at my firm.
Right now, the full-service guys are in an untenable position. They can't keep their customers from stealing their ideas and then going on the Web and executing trades for a fraction of the price away from them. But there is a huge profit center that these full-service guys can maintain if they don't blow it: the credit balance.
Soon, however, that could go away as well. If
develops a common e-bank platform, I can't imagine that you would want your money doing anything but searching for the highest, safest yield overnight, an endless pursuit that can probably be automated. That pool can be tapped into to do e-trades with your e-broker, but it would remain under your control, getting a great rate. You might want to keep your money at an AOL-controlled bank, preferably one with a brand-name bank attached to it.
This change would be the full-service endgame. It would amount to the destruction of the profit margins of the full-service brokers and would leave them with nothing but the high-end carriage trade and those with no time or inclination to make financial decisions.
There is a logical way to blunt this, though: Tell people they can trade for free all they want and get free real-time stock quotes and research as long as they keep their assets with Full Service Co. Then you charge the customers 0.75% of the credit balance for the unlimited trading. Most people will trade no more or less than they use to, but they will pay for the convenience of free trading in the way they pay for the convenience of a checking account.
I know, this would seemingly be devastating to those brokerages that charge you $100 per trade -- or $200 or whatever the full-service folks are getting these days. But margins are coming down, and prices are coming down. The more research that is provided online, the less likely full-service guys can get away with charging full boat. Soon, the credit balance, the asset base, will go away, along with the hefty trading margins.
Self-preservation dictates that trading will soon be as free as checking. The technology will make it such a commodity that the free-trading solution will soon be obvious.
The guy who does it first wins.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At the time of publication, his fund was long America Online, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com.