RR Roundtable: The Internet: Friend or Foe?

John Vann heads John Vann Co., an investment advisory firm in Plano, Texas. Vann set up the firm in 1996 after 11 years at Dean Witter. Vann provides both investment management consulting and discretionary portfolio management to an asset base approaching $1 billion. He's been in the securities industry nearly 30 years.Hillery Schanck, an investment consultant with IJL Wachovia in Virginia Beach,

John Vann heads John Vann Co., an investment advisory firm in Plano, Texas. Vann set up the firm in 1996 after 11 years at Dean Witter. Vann provides both investment management consulting and discretionary portfolio management to an asset base approaching $1 billion. He's been in the securities industry nearly 30 years.

Hillery Schanck, an investment consultant with IJL Wachovia in Virginia Beach, Va., provides investment management consulting to high-net-worth individuals, foundations and endowments. After seven years in the business, Schanck left in 1995 to coach brokers in business-building skills. He returned to production in 1998.

Stephen Cordasco, a senior vice president with Wheat First Union in Philadelphia, specializes in retirement planning for individuals and corporations. He hosts a weekly three-hour radio financial talk show. Cordasco has been in the business since 1990.

How are your clients and prospects using the Internet? What questions do they bring to you?

Cordasco: I'm getting it from two fronts. Clients want to know if they can access their investment information online, and what tools we have to help them do that. And more often lately, people want to invest in Internet companies, especially my normal CD investors.

Schanck: That's quite a switch, isn't it? The people who talk to me are looking to the Internet for a higher level of communication. Monthly statements are nice, but being able to get performance reporting online and being able to dial in for it is better. Once they have online performance reporting, I find their interest in it wanes rather quickly.

Some clients also talk about trading on the Internet. And because I don't follow stocks for them, I actually encourage them to do it either through Schwab or through E*Trade where they get a commoditized price on the trade.

Cordasco: My clients don't mind paying the $3,000 or $4,000 for the big picture planning that we're doing. But when they hear they can do Internet trades for $8 or $9 and they're getting charged $300 here, it sends up some red flags and causes a discussion I don't want to get in to. So I'm trying to direct them to do their stock business through online brokers.

Vann: I encourage my clients to utilize direct trading. I'm a member of the Schwab Investment Advisor Resource Program. Schwab has found that a fair number of their clients are leaving each year, concluding that they want someone to manage their assets for them. In those cases, we are receiving four to six referrals a week. The average account size is around $400,000. I think the world is separating into the do-it-yourselfers and people who are seeking some advice.

Schanck: I totally agree with that. We have moved away from a human transaction in which an investor can actually talk to somebody and ask questions, to an Internet transaction in which an investor has to find the information. Nobody's going to say, "Are you sure you think this is a good idea?" It's reduced some so-called do-it-yourselfers to people that decide they really want advice.

Vann: We're finding Internet usage is very important to our clients. We handle a lot of 401(k) plans. We use the Internet as a method to communicate with plan participants. For example, on Aug. 31 last year, we were able to post a letter to all clients on our Web page so they could access it immediately. We have some 800 clients, and we've had 16,000 hits just since Jan. 1. So that means people are accessing our site to look for information.

Hillery and Stephen, what would you like to be able to do with the Internet? Would it be great to have your own Web page?

Cordasco: Absolutely. I tried early on to set up a Web page and compliance just shut it down. I probably average 30 to 35 e-mails a week from clients and prospects, and it all has to go through my firm. So I know there's demand out there to use the computer to connect.

Schanck: I couldn't create my own Web page because of the compliance issues. Most clients are not using online account access, but I would love to be able to integrate more technology, because I'm getting more and more e-mails, too.

On the 401(k) side, it's critical to have the Internet because you don't establish an individual relationship with a lot of the people in the corporation. Giving people the ability to get to you through some communication vehicle is very important.

Cordasco: As I try to market myself to the younger generation, I find myself restricted. I can't give what Schwab gives in the form of technology. My business isn't able to grow in the direction I'd like it to grow--picking up some younger investors--because I don't have some of the tools they want.

What are some of the online tools the younger generation wants?

Vann: We're getting a lot of younger generation clients, particularly clients from 401(k) plans. They want the ability to get account information when they want it, but I don't sense many of them are looking at it on a day-to-day basis. From my Web page, I link them directly to their account at Fidelity, Schwab or PaineWebber Corresponding Service Corp. Those are the three firms we use for custodianship and clearance. From our Web site, we also link them to research reports and information on their money managers.

So it sounds like the younger generation of investors wants their financial advisers to provide Internet access to a lot of financial information, but they don't necessarily use it. What has been your experience?

Schanck: Internet access to accounts is like daily telephone switching in the 401(k) business. Everyone wants the ability to do it, but most don't need it or use it. Reps want to be able to say that they have it. And because the technology is relatively cheap now, it's one of those bells and whistles that has to be included.

Vann: We're starting to see heavy utilization of our Internet site with clients contacting us via e-mail. We're also having prospects contact us online, though these come from our Schwab Investment Advisor Resource program. Schwab sends a package on us to an investor and recommends the investor look at our Web site. From there, the investor will contact us through our Web site requesting more information.

Do you feel that cheap online trading and access to amazing amounts of free information about investments puts a lot of pressure on full-service financial advisers to make sure they're truly adding value for clients?

Cordasco: The pressure is the same as it's always been. It's human nature to try to get something for as little as possible. If someone can buy Microsoft through me for $150 a transaction or get it for $9 a transaction, I think they're going to get it at $9. There are other parts of the business I'm able to get and get paid on, and those parts are what I want.

Schanck: The only difference I'm seeing is that investors know more concepts than they did before. They're certainly aware of the concept of asset allocation. Five to seven years ago, we were trying to get them to understand that. People are even beginning to understand managers' style, which I thought would never catch on. So I think the Internet is good.

Put another way, if somebody published a magazine for do-it-yourself plumbers, would that ruin the plumbing industry? I think it would excite the plumbing industry because people would try to do it themselves, they'd hate doing it, they'd do it wrong and they'd end up hiring a plumber.

E*Trade released information that its customers are losing money for the most part, trading in high velocity. When it starts coming out that people are losing money on E*Trade, eventually people are going to say, "I've done that. It's now time for me to have advice."

Vann: That may have some merit, but I'm a stockholder in a day-trading company. One of my clients approached us about starting a day-trading company, and we did, as a separate entity. The company runs a $2,900 class that's required before allowing someone to trade. At the end of the class, if clients want to become day traders, they sign certain disclosures.

The success ratio has been almost the reverse of E*Trade's. The facility has 27 day-trading stations and people are standing in line to get to them simply because they're being taught how to make money. As people become involved in day trading, I think they're going to realize they have to go to school for it, graduate and learn how to navigate the highway.

Schanck: Those people paying $2,900 to learn day trading, they've just hired an adviser.

Do you have people coming to you who've made mistakes on the Internet?

Cordasco: A fair amount of people coming to my seminars and e-mailing me for help have tried Internet investing. They are looking for something easy and something that will give them what they want. But I'm not getting too many people coming to me saying they made big mistakes.

Schanck: My situation is probably the same. My average account is around $1 million to $2 million. They're not really making disastrous mistakes. The last thing they want to do is come home from work and spend a couple of hours on the Internet trying to figure out what they're supposed to be doing. If I can reduce the amount of time they spend on this, they feel it's money well spent.

Vann: If you were to have this conversation with an adviser in the Silicon Valley, he'd say there are hundreds of thousands of people who will not be clients because they do everything on the Internet.

I find that my clients who are doing Internet trading do it from their office. I go to the offices of some of my very wealthy clients while I'm visiting their facilities, and I'm surprised they have accounts up on their computer screens. Some may be ours and some may be accounts elsewhere. I think we're only seeing the tip of the iceberg.

Cordasco: There's no doubt about that. When I meet a new client to do fact-finding, it turns out that he has at least one computer-savvy child. At a certain age, the kids start to get a little more involved in the finances of the parents. You get a little bit of pressure from the kids saying: "Dad, you're paying all this money for advice. You could save some money. Here's what you can do on the Internet." The media has jumped on the bandwagon, telling investors they shouldn't be paying a whole lot for financial services.

Vann: I take issue with one thing you said. I've never heard that investors shouldn't be paying a lot for financial services. I've heard they shouldn't be paying a lot for transaction services. I think we're confusing the service we provide with the completion of transactions.

Morgan Stanley Dean Witter has Internet trading through Discover, but it also has retail salespeople who work with clients. Are MSDW brokers feeling pressure from Discover competing with them on the Internet? I suspect that the reps really don't feel that pressure. Those who are going to make the transaction on the cheap are probably not the same clients that come to us for our services.

Cordasco: I'd be surprised if clients understand the difference between a transactional broker and a financial adviser. At least a lot of the people I deal with don't separate the two.

What can the full-service brokerage industry do to better communicate its value compared with the online trading firms?

Cordasco: I argue all the time with my firm that we have to get the message out. There's no reason why these Internet companies or these no-load mutual funds that are now getting into the advisory type of business should be eating our lunch. We sit back as this old stodgy industry and just kind of plug along.

Vann: I want to make a comment on getting the word out. We recently were awarded Dalbar certification. We posted that on our Internet site and sent out a news announcement to the local press and our clients. I think it's incumbent on each and every one of us to distinguish between transactions and financial planning or investment management services.

For example, the Schwab advertising says, "You need an adviser." Since it ran those ads, our leads have picked up dramatically. The reality is that the majority of the world is unfamiliar with finances. People are going to seek a financial adviser, just like they seek an attorney for legal matters. We don't see attorneys sitting around worrying about do-it-yourself wills on the Internet.

What are you finding on the Internet that's helping you?

Vann: We have our own Internet site (www.johnvann.com), so it is an effective way for us to communicate. We try to stay on top of each of the Internet search engines so that we'll come up on the first page for those investors who are randomly searching. We also let our clients know they can access our site, and we've had clients give referrals to other people who have looked at our Internet site.

Schanck: The Internet is a huge source of research that the firm will never be able to get. I can get information on money managers I work with. It becomes a means of them communicating with me. One of the greatest things is the ability to get index information immediately after the end of a quarter. I get help in distilling what happened in Europe this quarter, for example.

Cordasco: The Internet doesn't limit me to what my firm offers. If a client calls up and wants to talk about a particular topic that might have to do with financial planning or a specific stock, I can get information through the Internet. At least I can get something that's going to help me be able to talk logically to that client.

Bill Burnham, an electronic commerce analyst at Credit Suisse First Boston, told us earlier this year that "the Internet, used properly, could be the broker's best friend." What do you think about that?

Vann: I'd be in agreement with that 100%.

Schanck: I agree. I think it's equally a threat and a huge opportunity because it's where our world is moving in terms of communication. I think there are just so many ways we haven't even imagined that we'll be able to use the Internet. I mean, we could be video conferencing with our clients five years from now.

Cordasco: There's no doubt about it that life is easier for the clients I communicate with through the Internet. If that happens to more people dealing with me, the Internet is only going to help my business.

We'll wrap it up here. Thank you for sharing your thoughts.

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