June 1, 1999
Full-Service Brokers Lose Out
As Do-It-Yourselfers Go Online
By RANDALL SMITH
Staff Reporter of THE WALL STREET JOURNAL
CLEVELAND -- Robert A. Frantz, a veteran broker here at the McDonald Investments unit of KeyCorp, sent an urgent e-mail late last year to his boss.
He had just lost an account with $4 million in assets because the customer wanted to trade stocks online. McDonald didn't offer the service. Clients are "crying out" for it, Mr. Frantz said, adding: "If you don't offer it, they may leave." Even his brother has bugged him about online trading.
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The missive hasn't fallen on deaf ears. Thomas M. McDonald, who heads the firm's brokerage operations, recalls receiving a spate of such messages asking him about when the firm would offer cybertrading. His brokers, he says, were "concerned we're falling behind." The result: McDonald aims to offer such a service by early next year.
It is a scene being played out in scores of securities firms across the nation. Now, with Merrill Lynch & Co.'s bold plan to offer discounted online trading, the pressure to stay competitive in Internet trading has been ratcheted up several notches.
Even before the expected Merrill move, the explosive growth of online stock trading at deep-discount commission rates had put many full-service, full-price brokerage firms in a bind. Initially reluctant to jump on the bandwagon for fear it could cannibalize their full-commission business, such firms are in a scramble to get on board.
Who Eats the Mistakes?
The issue has become a subject of debate at McDonald, a midsize firm with 725 brokers that was acquired last year by KeyCorp, another Cleveland financial concern. Some brokers are up in arms.
One of them is Michelle Conley Hegarty, whose average client has more than $1 million in assets and who ranks among the top 10% of McDonald's brokers, based on production. Ms. Hegarty questions how she could exercise the appropriate oversight over clients' online trading.
Ms. Hegerty generally refers clients to independent money managers and charges a fee based on the size of their accounts. She says: "My concern when we set them up" to engage in online trading is "what's our responsibility" to monitor "inappropriate" trading? "Should we butt in on them?" She adds: "You can't tell a guy he doesn't know what he's doing."
And if a client mistakenly enters an order to buy 10,000 shares when he intended to buy only 1,000 shares, Ms. Hegerty asks, "if it plummets, do you eat it?" In other words, is the firm or the broker on the hook for potential losses?
Mr. McDonald acknowledges that individual brokers within the company are "poles apart" on the issue. At one end, he says, are brokers who believe "we have no business in this business." At the other are those who say "if we don't get in this business, we're lost."
Some brokers who oppose the advent of online trading at McDonald, he adds, fear losing touch with their clients, or "think this cheapens their advice." Online brokers charge commissions as low as $8 a trade, far below the range of $100 to $500 typically levied by McDonald, where the average "ticket" is $275.
Patrick J. Swanick, the KeyCorp executive who is spearheading the planning for McDonald's online offering, says that online trading has reduced the trading function to "a commodity" -- highlighting that it is advice that the brokers are really getting paid for.
But the McDonald executives also believe that many clients who have fled full-service firms in search of lower commissions may come back someday -- in a market downturn. "All we have to have is a good, roaring bear market, and people will come back looking for advice," Mr. McDonald says.
Costs and Benefits
Robert T. Clutterbuck, president and chief operating officer at McDonald, says that cost is a consideration as the firm searches for a partner to provide the underlying technology for online service. "We will not blindly write a check," he says; the firm must first know the costs and benefits.
Mr. Clutterbuck also believes that online trading doesn't pose a big threat to the kind of sophisticated financial planning needed to tackle complex situations, but rather fits in among the menu of services offered by the firm. "At the end of the day," he says, "you're not going to do estate planning on the Web site."
The McDonald executives say they weren't seriously considering the need for online trading until after online usage for retail sales took off during the Christmas shopping season -- around the same time as Internet stocks, including those of online brokers, took off, as well. Now, says Mr. McDonald, "we probably lose accounts to E*Trade [Group Inc.] every day."
One McDonald broker, Richard W. Comstock, age 34, who has been working in the firm's Akron, Ohio, office for less than a year, acknowledges that online trading threatens his future. "Yes, I think there's a risk of loss of business," he says. "I'm clearly at risk."
Value of Advice
Yet he believes in the value of advice he can give to clients, such as counseling them to choose a technology mutual fund instead of blindly chasing Internet stocks after hearing friends brag about their own trading profits, or by helping clients select quality bonds with varying maturities. "Explaining that is worth something," he says. "I've got a guardianship role here."
Ms. Hegarty, the broker who opposes online trading, says Internet investing may be fine for younger investors. But they may need more help as they age, accumulate more substantial assets and outgrow the do-it-yourself approach.
Mr. Frantz, the broker who lost the $4 million account over the Internet-access issue, says the firm is "moving as quickly as we possibly can" to offer online trading. Yet he has also had some clients leave and return after losing money because they couldn't get "timely execution" on their orders.
Do some of his 400 clients sometimes take his ideas and sneak off and execute them at a lower cost with an online rival? "I'm sure it's happened," he says. However, he says he makes few calls suggesting specific trades, because 60% of his clients farm out their money to outside managers, paying Mr. Frantz an annual fee for helping select them.
But for clients seeking the "thrills of the gamble," he says, "you can get that by going to E*Trade, and you can probably do as well by going to Vegas and rolling the dice. They'll always tell you about their successes, but you can lose a lot of money." |
