Online Brokers Finding It Hard to Hold Customers

The online trading industry is losing established investors faster than it can replace them with new traders, according to a study by J.D. Power and Associates, which means brokerages are turning to new services to retain and attract traders.

The “2001 Semiannual Online Trading Investor Satisfaction Study” found that the online trading industry lost 18 percent of established online investors in the last six months and saw only an 8 percent increase in new investors. The study is based on responses from a random national sample of 8,626 online investors who primarily invest with one of 15 firms included in the study, which comprises more than 80 percent of the market.

J.D. Power found that in an attempt to attract and retain customers many online brokerage firms have turned to aggregation services, which provide investors the convenience of compiling all online accounts information on a single Web site — even from other investment firms and financial institutions. According to the survey, 45 percent of online investors agree that aggregation would allow their brokerage firm to better assist them with their total portfolio strategy.

“The name of the game now is consolidation,” said Nancy Salk, director of investment services at J.D. Power and Associates. “We’re at a critical point in online trading where brokerage firms need to provide consolidation incentives to investors. With multiple brokerage usage on the decline — from 42 percent of investors using more than one online firm down to 24 percent in the last six months — the push for existing online investors to consolidate their accounts is becoming the strongest strategy for online brokerage firms to increase revenue.”

The study also found that the drivers of overall satisfaction have shifted under the current market conditions. Investors previously favored customer service as the prime contributor to overall satisfaction, but now information resources offered by the firm is now the key driver, followed by customer service, core values, Web site capability, cost and trade execution.

Account aggregation has been popular with financial institutions of all shapes and sizes as a tool for inspiring loyalty and attracting new customers. But a report from Forrester Research found that low customer adoption, high vendor costs and firms’ inability to mine that data will prevent firms from turning aggregation into profits.

“Financial firms are blindly rushing into aggregation without a solid business model — and they won’t succeed,” said Catherine Graeber, senior analyst at Forrester. “Few firms have the right attributes to offer it successfully. Even the ones that pass the test to offer aggregation won’t profit from it as a stand-alone service.”

Why then are firms from banks to brokerages to Internet portals diving into the aggregation pool? Forrester says it’s a fear of losing customers and falling behind the competition. Unfortunately for such firms, the idea of account aggregation is a bit advanced for most consumers, who don’t consider their financial lives to be complex enough to warrant aggregation. Furthermore, interest in aggregation drops when consumers are told that they have to relinquish their online account user name and password to a provider. Forrester found that only 7 percent of U.S. online households are interested in aggregation and are unconcerned about giving someone access to their financial information.

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