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Market slump hurts online brokers
By Laura
Bruce • Bankrate.com
 Just
as investors are taking a beating during this market slump, so are
the online brokerages. A good portion of their revenue comes from
trade commissions and trades are down 40 percent by some estimates.
During the bull market, trading was fast and furious
as investors racked up big gains -- at least on paper. Online brokerage
firms popped up like mushrooms. This slump could mean we'll see
fewer online brokerages and fewer online traders.
"There's way too much supply of online brokerages
and not enough customers," says Jaime Punishill of Cambridge,
Mass.-based Forrester Research.
"There was the expectation it would never end,
that there was an endless supply of folks who would always trade
like this. Building a business model around a best case scenario
doesn't leave you much room for error."
Some do-it-yourself stock traders also are trying
to sort things out after watching big paper gains in their portfolios
evaporate. Some have decided to give their money to professionals
in hopes that they can pick better stocks.
But, Nancy Salk of J.D. Power in Agoura Hills, Calif.,
says only low-volume, generally less-experienced traders are ditching
their online accounts.
"They were hit the hardest, they didn't get out
in time. Heavy traders, those that make 36 or more trades every
six months, plan to increase their volume over the next six to nine
months because they're optimistic about the market. Moderate traders
will also maintain their activity. Only 12 percent say they'll decrease
their trading in the next six months."
Forrester's Punishill estimates the growth in online
trading will crest in 2005 when, he says, more than 21-million U.S.
households will trade online.
Punishill says there's no reason to be leery of online
trading.
"This isn't about advice vs. self-directed. That's
unfair -- it presumes the individual can't pick stocks and that
advisers did really well," says Punishill.
"Forget the Internet. Are you a self-directed
investor? If the answer is no, why go online? Can I make my own
decisions? Am I comfortable? What kinds of services make me comfortable?
Would I feel better walking into a branch to bring them a check,
or even just to scream at somebody? If I can make my own decisions
and don't need physical branches, then compare them on content,
features, prices."
People who decide self-directed trading is for them
may find brokerages that were once "strictly online, strictly
for do-it-yourself traders" are changing their tune to survive.
Reduced revenues from commissions and margin trading are forcing
online brokerages to add services -- especially ones that generate
fees such as portfolio management, retirement planning, estate planning
and the like.
One company that is aggressively branching out is
E*Trade.
"E*Trade has a simple aspiration," says
Punishill, "to be No. 1 in the world."
E*Trade, in addition to adding online banking and
a network of thousands of ATMs, has begun putting 400 square-foot
E*Trade stores in SuperTarget stores.
"The goal is to offer integrated products and
services to customers," says E*Trade spokeswoman Deborah Newman.
"Instead of just being a brokerage centered company or just
an Internet centered company, the logical step is to create a financial
services forefront."
Punishill says the trend for online brokerages to
expand their products and services was expected.
"We never thought the online only brokerage would
be very big all by itself. It doesn't serve the vast majority of
individuals. There are a couple million households total that can
be served by an online broker -- maybe."
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