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The New E-Brokerage Idols

By Elizabeth Millard
May 28, 2003 4:00 AM PT

In some industries, it is easy to tell who is at the top of the heap. The office software realm has Microsoft, the beer world has Budweiser, and for much of the cola-loving planet, Coke is it. Among online brokerages, however, crowning a king is not so simple.

The New E-Brokerage Idols

Although success can be measured by most trades or most assets, these can be misleading distinctions when trying to select a clear winner. The reason is that the potential candidates have strengths and identities as varied as those of recent American Idol finalists Clay Aiken, Ruben Studdard and Kimberley Locke.

Unlike industries in which companies tout virtually identical products, firms in the e-brokerage arena have evolved in different directions, with each company building on its unique focus and offering distinctive services.

Because of this phenomenon, the e-brokerage scene is populated by a pantheon of idols rather than a single shining star. Schwab, Fidelity, E*Trade, Ameritrade, Harrisdirect and TD Waterhouse represent a new constellation of business models that have morphed significantly since e-brokerages' early days -- and that are likely to keep changing over time.

Bubble Meets Brokerage

When the Internet first began to be used as a consumer tool for money management, online brokerage services sprang to life along with it.

Shaw Lively, a research manager at IDC-owned Financial Insights, told the E-Commerce Times that there was rapid growth in the number of players at first, stunning amateur traders with a wealth of options.

However, as some e-companies faltered and consumers hungered for other services, online brokerage firms changed.

"Many of those in the industry merged with each other or reinvented themselves," Lively said. "It became a very consolidated market."

Survival of the Fittest

Today's most well-known e-brokerages had vastly different starting points. Brick-and-mortar players, such as Fidelity and Schwab (NYSE: SCH), jumped online as the Internet boom picked up speed and began to compete with pure-play e-brokerage firms like E*Trade and Ameritrade (Nasdaq: AMTD).

Although these e-brokerages came from several different backgrounds, they all adopted the same model for a time, according to David Schehr, research director at GartnerG2. However, he told the E-Commerce Times, they have now veered away from each other again.

"Each of the leaders evolved to have different models," Schehr said. "The competition was initially driven by price per trade because everybody was buying stocks. Then they started moving into providing content or advice.

"I don't think it was a conscious decision that each set out to become different from the others," he added, "but I think they looked at their core capabilities and figured out how to play up the strongest attributes of their business models."

Paths Less Traveled

As e-brokerages began changing their services, the choices available to consumers became much more diverse.

Schwab chose to supplement its online trading capabilities with advice and research reports, and it shifted some focus to its branch offices. Fidelity bolstered its offerings by concentrating on perfecting its call centers.

TD Waterhouse's strategy is somewhat between Schwab's and Fidelity's, as it strives to offer both advice and customer service, while Harrisdirect has worked to tie its online arm more closely to its offline personal banking operations.

Meanwhile, the top two pure-play online brokerages, E*Trade and Ameritrade, have diverged, with the former greatly expanding its banking products and the latter sticking to its original model.

Ring Tone

Schehr's suggestion that e-brokerages embarked on these varied paths as a result of different priorities, rather than a conscious effort to differentiate themselves, is backed up by several of the brokerages.

As Fidelity spokesperson Dan Flaherty told the E-Commerce Times, "We made a calculated business decision to improve integration between the website and the call center."

Indeed, Fidelity streamlined its online operations to blend the two areas more fully. "They've created a very unified experience," Lively said. "They've given their call center representatives the ability to help customers via online means."

Thanks to instant messaging and browser sharing, Fidelity reps can help clients via Web, phone or, with increasing frequency, both at the same time.

Lively added, "Although they have physical offices like Schwab, they've decided to focus less on that the way that Schwab has, and put a lot of their focus on the call center and website combination."

Advice Column

Rather than throwing most of its energy into competing with Fidelity's customer service, Schwab has focused on beefing up its research and education offerings.

"Clients were asking for more advice, because they'd had bad experiences from not being diversified enough," Schwab spokesperson Sondra Harris told the E-Commerce Times. "They realized that the stock trading business isn't quite as simple as it seems; there's a great deal to know."

The company began offering independent research and equity ratings that were easy for even a novice trader to follow. It also created a search engine to allow clients to research stocks by using complex, layered questions that can lead to a customized table.

"We've put a very strong emphasis on education," Harris said.

Slippery Definition

As the new e-brokerage idols build out their business models as they see fit, the end result may be the loss of more and more common ground.

In fact, GartnerG2's Schehr said, "Most people wouldn't even refer to them as e-brokerages now, because that implies there's a one-channel operation, and that's not the way it is anymore."

Instead, the mechanics of trading have become only a single component of most e-brokerage firms. They are strategizing ways to support client decision-making and bolster the number of users by building on what each perceives as unique strengths.

"Who's the best?" Schehr said. "They've all grown so different from each other that the question can't really be asked, much less answered."

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