E-Brokerage Crossroads

By Lauri Giesen

With nonbank competitors at a standstill, banks can gain market share in online brokerage — if they target the right customers.

Banks have reached a crossroads with their e-brokerage operations. Should they advance or regroup?

It was only three years ago, before the stock market began its precipitous slide, that online brokerages such as E*Trade Group, Ameritrade and Datek Online were signing up thousands of new customers a day. Charles Schwab & Co. alone had more than four million customers trading online in 2000. Eager to share in this growth, banks began buying and building their own e-brokerage capabilities.

As a measure of how much the market has changed, the big concern for everyone in those days was capacity — having a robust infrastructure that could handle customer demand. Today, with the market languishing in the worst downturn seen in decades, capacity is certainly no longer an issue. Nonbank competitors are laying off employees, day trading has faded as a cultural phenomenon and more investors are seeking professional help with their investment strategies. Banks that invested in e-brokerage capabilities now face the question of what to do next.

There are two basic choices. One strategy, favored by institutions such as Wells Fargo & Co. and Harris Bank, is to use this down market as an opportunity to grab market share. With nonbank competitors retrenching, the thinking goes, banks can strengthen their online operations and recoup some of the investor dollars lost to brokerage firms over the past several decades. And by acquiring new self-directed trading customers, they will gain a large — and generally prosperous — base for cross-selling other services.

Other banks feel their current online capabilities are sufficient and prefer to focus on other things, such as investment advice. "Most banks already meet the basic trading and advisory needs that can be provided online," contends Larry Tabb, vice president of the securities and investment practice at TowerGroup Inc., a Needham, Mass.-based research and consulting firm. "They don't need to spend a lot more on their online investing channels."

The debate essentially comes down to the question of what customers really want. Is the market for self-directed traders as large as it appeared during the boom years? Or was that a temporary phenomenon masking investors' more fundamental need to obtain advice and direction from professionals?

Complicating things is the fact that the decision to trade either online or with a broker is not always mutually exclusive. Many investors use both channels. They place their own buy-and-sell orders online for stocks they are familiar with, and they turn to advisors for additional suggestions and overall investment strategies. Those banks that can entice investors to place some trades with their online brokerages can then promote their broader investment assistance to those same investors.

Inevitably, most strategists are likely to gravitate toward some middle ground, i.e., improve their online capabilities but also devote substantial resources to the human element. These institutions recognize that the market will eventually recover from today's doldrums and that they must be prepared to serve customers however they wish to be served.

Catching Up

Despite all the investments banks have made in their online trading operations, nonbank competitors still hold the upper hand in this business. In its most recent ranking of the top 15 online trading sites, Waltham, Mass.-based Gomez Inc. identified only five owned by banks: Harrisdirect (Harris Bank); TD Waterhouse (Toronto-Dominion Bank); Cititrade (Citigroup Inc.); Wells Trade (Wells Fargo) and Quick & Reilly (FleetBoston Financial Corp.).

Though the largest banks arguably have the most developmental resources, ironically, some of them fare poorly in the rankings of online brokerages. Dan Burke, director of brokerage services at Gomez, puts Washington Mutual Inc., Bank of America Corp. and Bank One Corp. in that category. "Typically, the online user experience is not as good with banks as it is with companies like E*Trade and Charles Schwab."

Burke says many bank sites lack the online tools needed to enable customers to check out for themselves the strategies recommended by brokers. "Even investors who don't trade online want to go online to get advice and information." And the bank or investment service that gives them the best online tools is likely to get the trade — either placed online or offline.

Most banks provide analyst reports on potential stock picks, along with detailed performance and trading information on publicly listed companies. But that's not always enough. Burke says banks also need to provide weekly or daily trading news bulletins; alerts regarding fresh research on designated companies; alerts when those stocks hit a certain price threshold; and complex financial analysis tools that allow customers to measure how their current portfolio matches their long-term financial needs.

Such capabilities require resources, which are hard to come by in the current environment. With the decline of the stock market since spring 2000, online trading doesn't have its former urgency. "There is a lack of confidence today," says TowerGroup's Tabb. "Most retail investors don't know what to do. Three years ago, everyone was moving online, but today they're going back to their advisors and asking for help."

This situation could spell opportunity for banks, which have always enjoyed the trust of their customers. Many of the hot online brokers of the late 1990s, which relied on trading fees as their primary income, are in trouble or have been sold. Banks, by contrast, generally are still flush with capital, despite some earnings problems, and now are poised to take market share in this area.

But a case can also be made that banks should simply maintain their current levels of online functionality, or provide links to brokerage partners, and devote scarce resources to other areas of their investment operations, such as experienced advisors. Ultimately, it comes down to a question of what customers want — advice or do-it-yourself trading.

Gomez's Burke agrees that consumers want more hand-holding than was the case two or three years ago. But he still believes those customers also want online tools to analyze how various suggested investment strategies will suit their long-term needs. He says banks will need to give more attention to their Internet offerings to fill this demand.

Educational Tools

That's certainly the view at Wells Fargo. "Investors are feeling really challenged by the market right now and need a lot of educational tools and online advice," says Jennie LaSalle, senior vice president of online personal finances at Wells Trade.

In the mid-'90s, San Francisco-based Wells Fargo became the first U.S. bank to offer online trading, and it has been adding new features and functionality ever since. Last year, for example, Wells Trade introduced ShareBuilder, a service that lets novice investors purchase fractional, or dollar-based, shares of stock.

Wells Fargo also offers an investment game that allows consumers to get comfortable with investing in the stock market by placing trades with "virtual" money. The investment game is geared to bank customers who have not invested in the stock market on their own. "We view this as a test drive," LaSalle says. "A lot of consumers don't feel confident about investing in the market."

Customers playing the game over a three-month cycle can win a prize if they are successful. Presumably, when users see how easy it is to place stock bids using imaginary money, they'll feel comfortable placing real bids using their own money.

There's also the Portfolio Analyzer service, a portfolio allocation analysis tool. Investors fill out a lengthy questionnaire that asks about their lifestyle and retirement goals. The Analyzer considers other anticipated life changes and then develops an investment strategy that most closely fits the customer's lifestyle and future needs.

Like its nonbank competitors, Wells Trade offers online alerts that notify investors when a certain stock hits a designated price point or has experienced particularly heavy trading in a given day. Other electronic tools can analyze the 7,000 different mutual funds sold by the bank so that an investor can find the one that most closely meets his or her strategy and interests.

As a result of offering such features, Wells Trade is currently the fastest-growing portion of the Wells Fargo private client services group, with the number of online accounts up 26% just in the third quarter of 2002, LaSalle says. Wells Trade currently has more than 67,300 active traders and another 37,000 customers that participate in ShareBuilder.

Like most bank-owned online brokerages, Wells Trade is targeting the long-term investor, a market that banks typically have been more successful with than short-term investors. "Our target customer has never been the active traders," LaSalle says. "We want people who are looking for long-term investment help, not making a quick return."

Outside observers agree the short-term trading sector is not a good one for banks to pursue. Such traders typically want a lot of technological bells and whistles, and they want them cheap. And they'll move to a new trading vehicle the minute they think they can get a better deal. They're also not usually interested in strategic guidance, nor do they care about other financial products.

In addition to being long-term investors, most of Wells Fargo's online traders are bank customers — 80% of them have another relationship with the bank, according to LaSalle.

Affluent Strategy

Wells Fargo's strategy of marketing online brokerage services to existing bank customers contrasts considerably with that of Harris Bank, a subsidiary of Bank of Montreal. Harris Bank has used acquisitions to build a customer base that is largely outside of Harris' primary geographic market. Many customers have no other relationships with the bank.

These relationships came to Harris via its purchase of the online brokerage divisions of Morgan Stanley and CSFB Direct, the former DLJ Direct online banking unit that was acquired by Credit Suisse when it bought full-service brokerage Donaldson Lufkin and Jenrette Inc. Harris is also acquiring My CFO, an online investment advice service that caters to the very wealthy.

These deals gave Harris 548,000 active accounts, to which the bank plans to market its suite of other wealth management services, including trust and estate planning, discretionary income management and private banking. Harris had only 116,000 online trading customers in September 2001, before it began its acquisition drive. While the majority of these new investors do not live in the Chicago area where Harris has its strongest presence, many of them do fit the affluent profile that Harris targets with its wealth management services. Because the acquisitions were finalized only within the last year, the bank has yet to measure how successful its cross-sell attempts have been.

Harris has already begun to approach Chicago-area users of Harrisdirect with its other offerings and has plans to approach customers in other select regions. "We're already actively acquiring a bigger bank presence in places like Florida, Arizona and California, and we will offer our other bank services to our trading customers who live in those regions and other areas where we believe there is a large affluent population," says president and CEO Bruce Schwenger.

Using the expertise of Bank of Montreal, which has been offering online brokerage in Canada since the mid-1990s, Harris has continued to invest in the online unit. It has quickened the speed of trading and added more features to the financial modeling tools, Schwenger says. "Harris' strategy makes sense for that bank because it was able to take advantage of the weak market to buy market share cheap with the hopes that the market will come back," says TowerGroup's Tabb. "On top of that, it has Bank of Montreal behind it, which has always been strong in the brokerage field, and it can leverage the brokerage business to grow its bank business."

Broader Appeal

While targeting the affluent may work for Harris, it might not work for other banks that lack Harris' track record of catering to the wealthy. David Schehr, research director for Gartner G2, the unit of Stamford, Conn.-based Gartner Group that follows technology-related industries, says banks need to devote more marketing resources to people in tiers below the most affluent.

"All the banks and brokerages are going after the technologically sophisticated, wealthy clients because they believe this base will be the most profitable. But customers with considerable assets are the ones who are least likely to pay a bank for advice, and they are also among those most likely to move over to a brokerage or pure online player to make their trades. Meanwhile, there are a lot of young customers who need investment help. And they will pay for that assistance."

Schehr suggests, for example, that banks pursue two-income, non-professional families who are trying to save to put their kids through college and for their own retirement.

Wells Trade, which is trying to appeal to a broader spectrum of investors than Harrisdirect, has targeted some of its newer features to these moderate-income customers. The investment game, for example, is designed for people who lack investment savvy. And its ShareBuilder product is particularly geared to people who have avoided the market because of the high price of stock shares.

ShareBuilder allows consumers to have a set dollar amount removed from their checking or savings accounts each month, to be used as part of a pool to purchase stock. Often, the amount may not be enough to buy a single share, so investors can either purchase a fraction of a share or build funds in a special account until there is enough to make a purchase. Wells charges $4 per transaction or $12 per month for unlimited purchases through ShareBuilder.

Whatever specific offerings a bank employs for its online brokerage, it needs to make sure those offerings appeal to the audience that the bank is pursuing. And for most banks, that audience needs to be one that will be interested in the other investment and banking products offered by the institution. A bank also needs to make sure its online unit projects the right message — that the bank is there to advise and assist customers in all their long-term financial investment needs.

Institutions that pursue such a focused strategy need not be deterred by lackluster market conditions, executives say. "We're taking a long-term view," says Harris's Schwenger. "After every bear market, there is a bull market — and we want to be ready for it."

Ms. Giesen is a freelance writer based in Libertyville, Ill.

Copyright © 2003 by Banking Strategies, published by BAI.

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