A survey of leading full-service and discount online brokerage firms by Deloitte & Touche LLP‘s Financial Services Industry practice, found that average activity in online accounts has declined 42 percent, as investors are taking a more conservative approach to their portfolios because of market volatility. The volatility that began in the spring of 2000 has also fundamentally altered the dynamics of the online securities industry, the survey revealed.
In contrast to last year when fear of system outages and a limited talent pool were among the greatest concerns of discount and full-service online brokers, this year’s participants cite the change in investor psychology as their primary concern. The survey suggests that online brokerages are responding by changing their business models to provide investors with financial information and advice, quality customer service, an array of products and innovative technology to gain competitive advantage, thus making the differences between them less distinct and quantifiable.
“Competing on price isn’t enough anymore,” said George Simeone, a partner in Deloitte & Touche’s Financial Services Industry practice. “The bear market has caused online securities firms to change their focus from generating trading volume to capturing longer-term investors with high-value accounts.”
Discount firms are being forced to compete based on quality customer service and breadth of products rather than just cost. Of the discount firms surveyed, 46 percent note that high-quality customer service is central to their positioning, while 31 percent cite low-cost services as important.
Investors are more interested in professional support to manage the fluctuating market conditions than they were a year ago. While 83 percent of full-service firms offer this capability, only 31 percent of discount firms can provide the same.
The survey results also suggest that discount firms are seeking to differentiate themselves from their full-service competitors by offering innovative technology. A larger percentage of discounters, compared to full-service firms, offer wireless access, streaming quotes and electronic communication networks (ECNs). More than three-quarters (77 percent) of the discount firms offer real-time streaming quotes compared with none of the full-service firms interviewed; and ECNs are available from 79 percent of discount firms, while only 33 percent of their full-service counterparts have this offering.
In addition to customer service, financial advice and technology, the survey results revealed a number of additional issues and trends. For instance, changing SEC requirements including those affecting customer protection are a prime concern for online brokerages; and operational challenges will claim almost half of discount and full-service brokerages’ IT budgets. Firms are also grappling with various new tax considerations given their charge to expand internationally.
Research from Jupiter Media Metrix forecasts more changes on the horizon. While nearly all online trades are initiated by consumers, a growing percentage will be composed of responses to brokers’ recommendations, as compliance obstacles dissolve, the research found. Although approximately 3 percent of online trades will be initiated through mobile Internet services in 2006, “responsive” trades driven via wireless email and promotions will amount to 100 million trades, or nearly 13 percent of all online trades, in the same year. Jupiter analysts predict that the shift from investor-initiated trades to broker-solicited “responsive” trades will represent a radical change in the way investors use interactive media to manage their personal wealth.
“The online trading field is now wide open for reputable brokers and dealers to use secure wireless and email technologies to encourage their customers to make responsive trades,” said Robert Sterling, senior analyst, Jupiter Media Metrix. “Responsive trading will be the premiere customer-facing wireless brokerage application.”
Broker-driven recommendations will be transmitted through secure email, with options for clients to make the specified trade, edit it, reject it; or, for registered representatives to follow up email notification with a phone call. Investors will have the option of receiving trade recommendations at their work email account, or through a mobile phone or other wireless device.
Jupiter forecasts that wireless brokerage transactions will drive approximately $1 billion in commission revenues in 2006, or 17.6 percent of all online trade commission revenue. More than 80 percent of wireless trading revenue in the same year to be composed of traditional full-service brokerage activity.
“The most important role of wireless data services in broker transactions will be driving responsive trading, rather than user-initiated trades, which make up the majority of online brokerage trades today,” Sterling said. “While such a service might not be something every registered representative will use, it will add to the firm’s service toolbox and represent a significant way for many reps to do business.”