Considering the speed, convenience, research tools, and minimal fees, why stay offline?
About half of all Americans who have a brokerage account currently trade stocks online. Thanks to the ubiquitous computer, the Internet, and the worldwide use of DSL technology, sweeping changes have occurred in the online stock brokerage and trading industry. Undoubtedly, the technology has altered the relationship between broker-dealers and their customers. Individual investors can now manage their own investments and place online trades without the assistance of a registered representative. In fact, relying on professional investment advisors has diminished significantly. Most traders now do their own research. The technology has made it possible for investors to easily access a number of sophisticated research tools and financial data directly from the websites of most online trading firms.
Fierce competition among firms that provide online services exclusively and those that provide a mix of traditional full-service trading and online options has benefited investors by driving down the cost of online trading. Most online brokerages now charge anywhere from $1 to $30 per trade—one of the biggest attractions to online trading—and many offer investors access to their services via phone, wireless connection, or office walk-in. They also offer access to the same investments—common and preferred stocks, ETFs, mutual funds and options, among others.
Given the fact that the biggest firms can offer the same investment vehicles and services—and still continue to generate significant growth year-after-year—underscores the increasing strength of online trading. Some of these firms are achieving a high level of growth through acquisitions, brand name recognition, or by investing in new technology.
Fidelity Investments
Each year, Fidelity Investments pours a substantial portion of its revenues back into technology to deliver new products and services to its customers. The brokerage also expanded its branch network during the second quarter, opening its 115th investor center in Nashville, Tenn.
“We continue to see growth in our retail brokerage business, which at the end of June 2007 had 11.7 million accounts and $882 billion in total client assets under administration,” says Adam Banker, spokesman for Fidelity Investments. “With the first wave of baby boomers heading toward retirement over the next few years, those firms that go beyond trading to provide a comprehensive set of tools and services that enable investors to plan, save, invest and, ultimately, manage their finances in retirement, will have the opportunity to grow tremendously.”
Fidelity is made up of two independent but closely cooperating companies, Fidelity Management and Research Corporation, founded in 1946 and serving the North American market, and Fidelity International Ltd., spun off in 1969 to provide investment products and services to clients outside the U.S. Fidelity offers investment management, retirement planning, brokerage, and human-resources and benefits outsourcing services to more than 23 million individuals and institutions, as well as through 5,500 financial intermediary firms. Offering more than 300 mutual funds, the firm is the largest mutual fund supermarket in the U.S., as well as the leading provider of workplace retirement savings plans, and a leading online brokerage firm.
The company has enhanced its stock research site with the addition of Standard & Poor’s Compustat Database of fundamental company and market data on over 8,500 securities. Its stock-screening capabilities were also extended with the launch of a preferred-stock screening tool, which enables investors to search for preferred stocks based on up to 12 equity characteristics.
By remaining on the cutting edge, the firm is consistently recognized by industry surveys and publications for providing some of the highest levels of customer support. A recent report by Cerulli Associates ranked the company as the leading provider of IRAs for 2006 across its businesses—including retail—with $539 billion in assets under administration. Compared to the same period in 2006, retail IRA assets increased 21% in the second quarter of 2007. For the first half (ending June 30, 2007), the company’s daily average commissionable trades and number of accounts both increased by 11%, to 354,741 and 18 million, respectively, compared to the same period in 2006.
TD Ameritrade
TD Ameritrade (NASDAQ: AMTD), based in Omaha, Neb., has been growing its online trading accounts through strategic acquisitions. Last year, the company acquired the U.S. operations of TD Waterhouse, which added over 100 retail locations, including 2.7 million clients. In 2005, the brokerage acquired 45,000 retail accounts from JB Oxford & Co. A year earlier, it bought Bidwell & Co., which added about 100,000 accounts and $5 billion in client assets. The acquisition of Brokerage America in 2003 added 11,500 accounts. These deals came on the heels of the merger with Datek Online Holdings Corp. in 2002 and that of National Discount Brokers Corp. in 2001.
With its retail accounts continuing to grow, Ameritrade’s third fiscal quarter (ending June 30, 2007) was the best quarter in company history. Net income amounted to $159 million ($.29 per diluted share) on revenues of $542 million. Return on equity rose 33% in the quarter. In July alone, the company generated an average of 284,000 trades per day. It also opened 44,000 accounts in the month, resulting in a total of 6.3 million accounts.
Ameritrade hopes to capitalize on the growth of the U.S. retail brokerage industry by leveraging the company’s brand, as well as its low-cost infrastructure, to grow its market share. Its strategy includes focusing beyond active traders to carve out a greater market share of long-term investors and registered investment advisors, and by focusing on the retail side, the company will be able to maintain its low operating cost structure. Plus, the capacity of its trading system will enable it to significantly increase the number of transactions while incurring minimal additional fixed costs.
Ameritrade’s services can be easily accessed either through the Internet, phone, or in person. “Anybody can walk into any one of over 100 branches around the country and discuss their portfolio,” says Jim Frawley, spokesman for Ameritrade. “Whether a person is completely self-directed, would like a little hand-holding, or prefers to have someone else entirely manage their money, we can help them.”
Having control over one’s account is what investors like most about the online trading experience. “Online trading has brought a new aspect of control to individual investors across the globe, and as a result, everybody has the potential to manage their finances in a more hands-on fashion,” says Frawley.
E*Trade
Since it was launched in 1996, New York-based E*Trade Financial Corp. (NASDAQ: ETFC) has built a brand that has become associated around the world with online trading. In August, the company launched operations in Singapore, making it the 16th branded website outside of the U.S. Today, the brokerage firm has branded retail websites in the U.S., Canada, Denmark, Finland, France, Germany, Hong Kong, Iceland, Italy, Sweden, the United Arab Emirates and the U.K. E*Trade currently services over 4.5 million retail accounts around the world. It also operates a branded educational website in China, but the site does not offer retail services.
“We recently launched the ability for customers to buy and sell stocks on six different exchanges around the world in local currencies,” says Chris Larkin, vice president of E*Trade Financial’s Active Trader division.
With 27 branches nationwide, E*Trade provides brokerage and banking services to the retail, corporate and institutional sectors. The brokerage division, which generates revenues primarily from commissions and margin lending, continues to draw most of the company’s customers. It also provides investors with direct access to international exchanges through a web-based platform. On the banking side, the firm provides a number of services, including interest-earning checking accounts, money market and savings accounts, sweep deposit accounts (where cash is held pending investment) and CDs.
“We believe the industry will get bigger, and research supports this notion as well,” says Larkin. “Long term, the demographics are pointing in the direction of a predominantly online environment. Our children—and our children’s children—are going to continue moving in this direction as broadband access continues to expand and people become more familiar with the online channel as a medium for conducting everyday business.”
Charles Schwab
Having taken an early lead in 1974 by offering low-priced order executions, Charles Schwab Corp. (NASDAQ: SCHW) quickly became the nation’s largest discount broker. But as the industry continued to grow, and other brokerages began to offer competitive fees, Schwab expanded its business by adding the same traditional brokerage services that it once shunned. Besides being a discount brokerage, the firm offers private banking, bond trading, annuities, and proprietary Schwab and Laudus mutual funds, as well as mortgages, CDs, and other banking products through its Charles Schwab Bank. Traders can access any one of these services via telephone, wireless device, the Internet, and through more than 300 U.S. offices.
“We are seeing more and more traders come to Schwab seeking educational resources, research tools, and reliable and knowledgeable customer service,” says Joseph Vietri, vice president of Active Trading and Investing Services. “Therefore, Schwab continues to aggressively invest in online trading tools and technology, such as advanced risk management and charting tools, to meet evolving client needs.”
Schwab is focused on attracting a much broader segment of investors. Earlier this year, the firm sold U.S. Trust, a fundamentally different business that serves the narrower market of ultra-wealthy Americans, to Bank of America for $3.3 billion. Schwab is heavily focused on growing its Schwab Investor Services, which targets people who are able to invest from $50,000 to $2 million. SIS is also targeting the retirement plan marketplace. In April, the company acquired The 401(k) Company, based in Austin, Texas. While Schwab has traditionally enjoyed strong growth in the small, mid and large retirement plan segments, The 401(k) Company serves mega retirement plans. During the past two years, its newly acquired plans have averaged more than $500 million in assets, with more than 8,000 participants.
These deals have produced solid results for Schwab. In July, the company’s monthly market activity report showed robust growth. New assets from new and existing clients totaled $12.8 billion, total client assets were $1.4 trillion at the end of July (up 21% from July 2006), and daily average trades totaled 300,100 in July 2007—up 21% from July 2006 and up 19% from June 2007.
— By Arnaldo Arroyo
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