April 27, 2001
Heard on the Net
Facing a Painful Downturn,
Web Brokers Squeeze Clients
By STACY FORSTER
WSJ.COM
Online brokerage firms have slashed their payrolls, trimmed marketing expenses and made other cost-cutting moves to counter a downturn on Wall Street that has slammed their business.
Now, they are putting the squeeze on their customers.
TD Waterhouse Group Inc. said Thursday that it is weighing higher commissions for its less-active clients as part of a series of initiatives aimed at buttressing its sagging revenues and profits. The firm didn't disclose details, saying the plan was still under review. Waterhouse now charges online commissions that range from $9.95 to $15 per trade.
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An increase is significant because it would be the first by a major online brokerage firm in response to the current market difficulties. Still, some analysts weren't convinced the move signaled a shift toward higher trading fees as firms feel the pinch from a protracted decline on Wall Street. They said competitive pressure will keep a lid on commissions.
"I'm not sure we're at the point where a competitive imperative to compete on price has gone away, but we may be reaching a point where the business model as currently priced just can't be profitable enough in the foreseeable future," said Guy Moskowski, a brokerage analyst with Salomon Smith Barney in New York.
Low commissions have been a major lure for online investors and the foundation of the Internet brokerage industry -- and the emphasis has been toward making them even lower. Indeed, most online brokerage firms have resisted raising commissions even as their clients have sharply curtailed trading recently.
Market volatility and declining stock prices have "pushed many of our customers to the sidelines" and resulted in decreased trading activity and margin borrowing, Waterhouse said. The company said last week that its margin loans tumbled to $4.6 billion at the end of March, down 60% from a peak of $11.5 billion a year ago. Meanwhile, average daily trades were 116,500, down 14% from February and down almost 60% from a year ago.
Waterhouse spokeswoman Melissa Gitter said any commission increase would be implemented Aug. 1 as part of a plan that would simultaneously lower transaction fees for clients who traded more actively. The company said a new commission scheme would boost annual revenue by $50 million.
"It means that we're going to be using customer segmentation to make every customer relationship profitable," Ms. Gitter said. "Customers will pay according to usage. Some customers may pay more than they do now, and some will pay less than they do now."
While Waterhouse might be the first major online brokerage firm to raise commissions, it isn't the only one to hit customers for additional revenue due to the industry's current difficulties. Other brokerage firms have been selectively imposing or raising non-transaction fees, charging for paper confirmations of trades and levying fees on inactive accounts, for instance.
"The online brokers have experienced reasonably strong account growth, but the goal is now to generate more revenue per client given the tough market conditions," said Richard Repetto, an electronic brokerage analyst with Putnam Lovell Securities in New York. "They've just got to get more money from each customer."
After spending lavishly to attract and retain customers, online brokerage firms are being forced now to squeeze profits from them in the new, harsher climate where stock trading is down sharply from its peak levels last spring. Indeed, many of the new fee arrangements announced by these firms have been targeted at inactive or unprofitable customers.
Ameritrade Holding Corp., for example, announced plans earlier this month to start imposing fees on customers whose accounts are largely inactive or have minimal balances. Beginning in June, Ameritrade will charge a quarterly fee of $15 on accounts that have less than $2,000 in total assets.
Waterhouse already charges $15 fees on accounts with less than $5,000, the same as E*Trade Group Inc. Charles Schwab Corp., the No. 1 online brokerage firm, charges quarterly fees that range from $15 to $25 on accounts with balances less than $20,000. All waive the fees for clients who make a certain number of trades each quarter.
The Waterhouse pricing plan is part of a combination of expense and revenue initiatives announced Thursday in an attempt to increase annual pretax income by $200 million by year-end. Those plans include an ongoing process to cut its payroll by 18.1% through attrition if the market doesn't improve -- from 8,180 on Feb. 1 to 6,700. The cuts will save $60 million in compensation and benefit costs by the end of the fourth quarter.
Although it is hoping to avoid layoffs, Waterhouse is among a crowd of online brokerage firms cutting staff amid a weak trading environment. Ameritrade, Schwab, Datek Online Brokerage, a unit of closely held Datek Online Holdings Corp., and CSFBDirect Inc. have all laid off employees in recent months. |
