*** WSJ Articles ***
Good articles from WSJ
>>>
April 27, 1999
Big Brokerage Firms to Launch
Online Trading Counterattack
By CHARLES GASPARINO and REBECCA BUCKMAN
Staff Reporters of THE WALL STREET JOURNAL
Big full-service Wall Street brokers are set to launch a
counterattack to head off low-cost Internet-trading rivals.
Prudential Insurance Co. of
America's Prudential Securities
Inc., Citigroup's Salomon Smith
Barney and even Merrill Lynch &
Co. -- a firm that has long resisted offering cheap, online
trading to most customers -- all are moving toward
giving more clients access to e-trading through
"fee-based" accounts. That is where investors pay a set
annual charge for a package deal including an allotment
of trades, rather than pay commissions for each trade.
The big firms' plan for Internet investors: Charge clients
a flat fee for investment advice and research, and give
them online trading as a bonus. At least two are
considering something even more revolutionary --
charging a nominal flat fee and a discounted per-trade
commission for online transactions, an acknowledgment
that the act of executing a trade simply isn't worth that
much anymore.
No one is looking for the big brokers to offer online
trading at the rock-bottom rates of Internet upstarts like
Suretrade Inc., a unit of Fleet Financial Group Inc., and
Datek Online Holdings Corp. (Each charge less than $10
a trade.) And some analysts say the moves may not
amount to much savings for full-service customers,
because they will still pay a fee for the privilege to trade
online, and in some cases, a commission as well.
"Firms are looking to provide a variety of pricing
options, and it's not a foregone conclusion that the
fee-based pricing structure is necessarily the least
expensive," says Henry McVey, an analyst at Morgan
Stanley Dean Witter & Co.
Still, the new offerings could help the behemoths better
compete with discount brokers such as Charles Schwab
Corp., which charge slightly higher commissions in
return for extra services. Commissions at securities
firms vary depending on the size and type of account, of
course. But the current gap among firms is huge. For
example, investors buying 300 shares of Yahoo! Inc. pay
roughly $315 in commissions at Merrill. At Datek, the
same trade costs $9.99. At Schwab, the trade costs $165
through a firm broker, and $29.95 over the Internet.
It is no surprise, then, that the bigger firms have been
competing through fee-based accounts -- rather than
slashing their per-trade commissions, which would
reduce revenues and profits. Prudential Securities, for
example, says it will soon charge clients just $24.95 to
make a trade either online or through a broker. The
catch: It must be done in a new type of account charging
investors an annual fee of roughly 1% to 1.5% of assets.
Currently, investors can pay several hundred dollars in
commission to buy and sell securities through a
Prudential broker.
"We understand that people pay us
a fee for advice, and we also
recognize that the cost of a trade is
a commodity, so we're willing to
price it as a commodity," says Hardwick Simmons,
president and chief executive of Prudential Securities.
Salomon Smith Barney is considering adding online
trading to its "Asset One" account, where investors
holding at least $100,000 will pay fees ranging from
0.5% to 2% of assets under management -- and get at
least 40 annual online trades free. For investors with a
$100,000 account, this translates into an annual fee of
$2,000. Assuming they make 40 trades a year, investors
would be paying the equivalent of $50 a trade, but that is
no different than what they pay now to trade through a
broker handling this account. Though these fees aren't
razor-thin, investors do get Salomon Smith Barney's
research reports and investment advice.
Merrill, the nation's largest full-service brokerage firm,
could launch lower-priced online trading before the end
of the year, people close to the company say. The firm
currently offers online trading only to its best customers
-- those with at least $100,000 enrolled in two specific
fee-based accounts. The flat fee includes a set number of
trades, which customers can place over the Internet or
with a broker.
But Merrill wants to open the Internet to many more
customers, people familiar with the firm say. So Merrill
is working on new "pricing models" that allow the firm
to do just that, the people say.
These new programs show that full-service firms, after
dismissing the significance of the Internet as recently as
two years ago, understand they need to make a stab at
lower-cost online trading. To attract and retain
cyber-customers, though, they must play up their ability
to provide sophisticated advice, since many online
brokers offer plain-vanilla trade execution for just a few
dollars a trade.
Meanwhile, full-service brokers are scrambling to retain
clients who potentially could defect to online rivals. At
the same time, the big firms, with an older clientele than
cyber-brokers, want to attract a new generation of
investors who are more techno-savvy.
Through it all, the volume of online trading just keeps
growing. Even nagging technical glitches, such as a
50-minute Web outage suffered by Schwab Monday,
can't seem to stanch the flow. A report Monday from
U.S. Bancorp Piper Jaffray said the number of online
trades soared 49% from 1998's fourth quarter to this
year's first quarter.
Yet investor activity at full-service firms is expanding
smartly, too. Merrill reported a 7% increase in
first-quarter brokerage commissions, to $1.57 billion.
There are plenty of investors who don't prefer to manage
their finances on the Internet. There always will be some
people busy or wealthy enough to pay for the kind of
personalized investment advice traditional brokers offer,
Morgan Stanley's Mr. McVey says.
But Merrill's percentage increase pales compared with
Internet brokers. Transaction revenue (composed mostly
of brokerage commissions) soared nearly 2.4 times in
the first quarter at E*Trade Group Inc., to $90.5 million.
The full-service firms acknowledge that many of their
customers already keep small, second accounts with
online brokers. Forrester Research Inc., an Internet
consulting firm, recently said that 10% of affluent
households -- those with $1 million or more in
"investable assets" -- now trade with all-online brokers
such as E*Trade and Datek.
What You Pay For
The cost of buying 300 shares of Yahoo! at several
brokerage firms and the services they provide.
Broker
Cost
Services
Merrill Lynch
$315-a
Personalized service with
one broker, who can
provide research, stock
quotes, advice
Charles Schwab
$29.95
online;
$165
through
a broker
Limited free real-time
quotes; research from two
investment banks; 24-hour
live customer service
E*Trade Group
$19.95
Free real-time quotes;
BancBoston Robertson
research for $9.95 a
month; live customer
service 8 a.m.-9 p.m. EDT
weekdays
Datek Online
$9.99
Free real-time quotes; live
customer service 8 a.m.-7
p.m. EDT weekdays
a-Could be discounted at broker's discretion; also could buy within a fee-based account.
Source: The firms
Those investors aren't just using "play money" for
cyber-trading, contends analyst Michael Gazala, who
wrote the report. He says 22% of the online house holds
had more than half their portfolios with the
Internet-investment firms, instead of their full-service
brokers.
But when they do start offering online trading, traditional
brokers can't compete only on price. Unlike E*Trade and
Schwab, firms like Merrill employ expensive research
analysts and invest huge sums in their brokers, who often
command six-figure salaries to dispense advice about
taxes, estate planning and retirement.
"The reality is, the advice component will likely be
separated from the trade execution," Morgan Stanley's
Mr. McVey says. "To some degree, I think that is where
we're headed." Mr. McVey should know: The Dean
Witter arm of Morgan Stanley is expected to roll out
online trading later this year to customers with the firm's
fee-based Choice accounts, a small number of whom are
testing online trading now. A pricing structure still hasn't
been determined.
PaineWebber Group Inc. is another online convert. After
saying as recently as 15 months ago that it still wasn't
sure if it would deploy online trading, the firm now is
gearing up to launch the service in the third quarter.
Pricing still hasn't been worked out.
Perhaps the biggest surprise is Merrill. Late last year,
Merrill brokerage chief John "Launny" Steffens publicly
bashed online trading and do-it-yourself investing as a
"serious threat to Americans' financial lives."
Now Mr. Steffens is taking a slightly different tack. He
has been discussing a plan to provide low-cost online
trading to more of the firm's customers, possibly even
without ever talking to a broker. Mr. Steffens declined to
comment, but a spokeswoman confirmed that Merrill has
started looking at ways to open Internet trading to more
of its customers.
Merrill, the spokeswoman said, wants to "expand client
choice and how they do business with us." The Internet,
she said, "will play an increasingly important role in our
service model and the value proposition for our clients."
>>>
April 27, 1999
Whose Advice Do You Follow:
The Fool, or the Alleged Guru?
I sat down to review two of this year's better-selling
investment books, fully prepared to dislike both. One of
them didn't disappoint me.
Understand, among journalists,
there is a certain knee-jerk
crankiness that makes us deeply
suspicious of anything popular.
And these days, few authors are more popular than
California personal-finance guru Suze Orman. Ms.
Orman has become a household name, thanks to her two
earlier books, her public-television specials and her
frequent appearances on "The Oprah Winfrey Show."
But with her growing popularity has come increased
media scrutiny. In the case of Ms. Orman's latest book,
"The Courage to be Rich" (Riverhead Books, 370 pages,
$24.95), the spotlight isn't flattering. How awful is Ms.
Orman's book? Judge for yourself.
"I have found that when negative emotions control the
purse strings, money will not flow purely and evenly,"
she tells us at the bottom of page 11.
"All money has the power to grow or to dwindle, and
when you unleash powerful thoughts over even small
amounts of money, you are turning toward more," she
adds on page 28.
Eight pages later, she asks: "Does money have a life
force, an energy force, of its own? I truly believe it does,
for I have seen its force at work, in small amounts of
money that, invested wisely over time, thrive and
prosper into fortunes -- that's the life force of money
given its full rein."
Finally, on page 81, she offers this gem: "The less
self-esteem you have, the more debt you create."
Readers who battle through all the psychobabble about
shame, fear, anger and self-worth are eventually
rewarded with some straightforward financial advice.
But it hardly seems worth the effort. Indeed, I can think
of much better ways to spend $24.95.
Which brings me to the other book I read. For a nickel
more, you can get "The Motley Fool's Rule Breakers,
Rule Makers" (Simon & Schuster, 340 pages, $25),
written by David and Tom Gardner. (Full disclosure:
My last book was also published by S&S.) I have long
been vaguely skeptical of the Gardner brothers and their
hugely popular Motley Fool Web site (www.fool.com).
All the cavorting in silly jester hats and chattering about
technology stocks never did much for me. But "Rule
Breakers, Rule Makers" is a worthy book and a decent
read.
It is, in truth, two books. The first and better-written
part, penned by David Gardner, talks about how to find
Rule Breakers, those fast-growing companies that are
transforming the world and, along the way, making their
shareholders filthy rich.
The current Rule Breaker portfolio, which can be found
at the Fool's Web site, includes such stocks as
Amazon.com, America Online, Amgen and Starbucks.
To qualify as a Rule Breaker, a company must -- among
other things -- be the first and dominant player in an
emerging market and have some sustainable business
advantage, strong consumer appeal and stunning
stock-market performance.
To make the cut, David Gardner adds in one of the
book's most amusing sections, a company must also have
been dismissed as ridiculously overvalued by the
financial media. Mr. Gardner then proceeds to shred
some of the media's many misjudgments.
The second half of the book, written by Tom Gardner, is
devoted to Rule Makers, those leading companies that
dominate their markets. The writing is more labored,
though the analysis may actually be more helpful,
because finding appropriate stocks is reduced to a fairly
easy scoring system.
Rule Makers are distinguished not only by powerful
brand names, healthy profit margins and conservative
balance sheets, but they also tend to be far ahead of their
competitors on each of these counts.
If this sounds like the sort of company that would appeal
to Berkshire Hathaway's Warren Buffett, it is -- almost.
The current Rule Maker portfolio includes American
Express and Coca-Cola, two Buffett holdings. But it also
includes hard-to-understand technology companies, such
as Cisco Systems, Intel and Yahoo!, which Buffett has
tended to shy away from.
In touting their two stock-picking methods, the Gardner
brothers are persuasive, maybe too much so. The book
takes stock mutual funds to task for their lackluster
performance, placing a hefty portion of the blame on the
outrageously high expenses charged by many funds.
The criticism is richly deserved. But there's a reason
high expenses lead to market-lagging performance. Most
fund managers can't beat the market by a big enough
margin to overcome the burden of their own expenses.
The fact is, the market is highly efficient and it is
extraordinarily difficult to earn market-beating results.
Those who adopt the Gardners' stock-picking methods
should bear that in mind. Yeah, their strategies have
done well historically. But like the mutual-fund
advertisements say, past performance is no guarantee of
future results.
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