E*Trade Starts Own Team of Analysts - TheStreet


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plans to offer something that's hard to find from traditional brokerage firms -- truly objective research. But analysts don't expect E*Trade or any other online brokerage firm to make a big splash in the research industry.

The online trading firm said earlier this week that it has created a team of equity analysts to produce research reports for the company's institutional investors. They were formerly with

Credit Lyonnais

, one of France's largest commercial and investment banks.

E*Trade's move comes at a time when the Wall Street investment banks are under fire. The conflicts of interest believed to stem from having underwriters and analysts conspire to build banking relationships have yielded a series of government probes, and most recently, a new set of

Securities and Exchange Commission

regulations covering research reports.

E*Trade said its analysts will provide unbiased, independent research that won't be clouded by the prospect of generating investment banking fees. But most analysts who follow the online brokers say E*Trade's new offering won't likely signal the beginning of a major new strategy by the online brokerage industry.

The How and the Why

For starters, building an in-house research team is costly, and analysts aren't cheap. Most online brokers, including E*Trade, are trying to cut costs to deal with the decline they've seen in market volatility, and the company recently agreed to shell out $100 million to acquire


. (E*Trade managed to grow revenue slightly in its latest fiscal quarter, but that was largely a result of the company's Internet bank unit. Brokerage revenue and the number of trades the company processed a day were down from the year-ago levels, a trend E*Trade hopes to reverse with the aforementioned acquisition.)

Perhaps most importantly for E*Trade, the bulk of its clients and those of the online brokerage firms in general, are retail investors, who don't rely very heavily on research to make their investments.

According to Jaime Punishel, a senior analyst at Forrester Research, investors who use the online brokerages tend to own mutual funds rather than individual stocks, and they don't depend on reports to make buy and sell decisions. In the smaller active-trader segment, which Punishel considers those customers who trade at least once a month, investors tend to have accounts at several brokerages, including the big traditional firms, and they buy research from the full-service operations.

Who They Are

E*Trade hired Martin Evans and six other analysts away from Paris-based investment bank Credit Lyonnais to provide the research to institutional clients. E*Trade already provides stock research, analyst actions, and earnings estimates and revisions compiled by other organizations. The company also has an arrangement that allows it to get research from

SoundView Technology Group



Competitors like

Charles Schwab




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TD Waterhouse

also offer an array of research to their clients.

Analysts who follow the online trading outfits weren't very enthusiastic about E*Trade's new hires. "It looks to me as a tough hill to start to climb," said Dennis Ceru, director of retail brokerage and investing at Tower Group, which provides research on industry trends to companies. "I wouldn't expect to see a rush of the other firms following suit. It's a costly business. My first blush reaction is that this doesn't fit their existing value proposition."

E*Trade believes the venture will pay for itself immediately, as the research department will bring with it new institutional clients, and that the venture should be profitable within the first year.

More than likely, the addition of a group of analysts isn't going to provide a major boost to the company's top line. Currently, E*Trade has about 650 institutional investors, nothing compared with the 6 million retail accounts the company handles.

Glenn Schorr, an analyst with Deutsche Banc Alex. Brown, said simply that online research hasn't been a big success with retail investors. "When Goldman Sachs research was available on Schwab's platform, it's not like it was being accessed very often," said Schorr. "It was people that were generating their own investment ideas, and acting on them in a lower-cost venue, and it hasn't graduated to the next level just yet. I'm very skeptical that this would drive an enormous move to the online brokerages."