Seismic Shift

Contrary to the "full service is dead" rhetoric of the popular media, Registered Representative's readers say that while they get questions and comments from some clients about trading online, they're far from feeling inundated or threatened."Most of my clients are not interested in doing it themselves. They're interested in getting recommendations from me. They want to know where I want them to go,"

Contrary to the "full service is dead" rhetoric of the popular media, Registered Representative's readers say that while they get questions and comments from some clients about trading online, they're far from feeling inundated or threatened.

"Most of my clients are not interested in doing it themselves. They're interested in getting recommendations from me. They want to know where I want them to go," says a Morgan Stanley Dean Witter broker who requested anonymity.

"The headlines have gone in the direction of 'full service is on its way out,' but I doubt that," he says. Some of his clients have opened small accounts on the side with E*Trade and the like, but they understand trading online for themselves is dangerous territory.

However, all of the publicity about 7 dollar trades has made clients "very cost conscious," says Brad Rubin, a broker with Salomon Smith Barney in New York. Even so, Rubin notes that it hasn't affected whether they want to trade with him.

But all brokers must face the price question more frequently, as well as other questions about online trading. Here's how they are responding.

Question: Why should I place my trades with you and pay hundreds of dollars in full-service commissions when I could just as well do it myself for less than 10 dollars or 20 dollars?

Bob Keller, a Merrill Lynch rep in Wilson, N.C., tells such clients to "get on the 800 number [for the discount firm] and ask one of the people there if the firm gets paid for directing order flow. If the person doesn't know, then you know right up front that you're dealing with the wrong firm. If they say yes, then you might want to shop around. And if the answer is no, ask if they will put it in writing."

Keller tells the client that if a firm gets paid for directing order flow (unlike Merrill), the investor might not be getting the best possible execution at the best available price. The example he uses is that of a 1,000-share trade at a fee of 10 dollars. With an additional one-eighth of a point, the trade would end up costing the investor another 125 dollars. Therefore, the real cost of placing the trade would be 135 dollars.

Chris Rall, a broker with Prudential Securities in Bryn Mawr, Pa., emphasizes the same point. He tells his clients that they can make up his commission just by being able to get a better price through a major firm that has its own representatives on the floor of the exchange and its own market makers.

Question: I want to transfer some assets to a discounter so I can dabble in online trading. What do you think?

Jon Riveire, a broker with Salomon Smith Barney in Louisville, Ky., says he tells such clients to "go for it." But he also asks them to agree that every six months, they'll take their online trading profits and "put them back in here, in their real accounts."

So far, five of his clients have withdrawn 40,000 dollars to 100,000 dollars to trade online with a discounter. Three lost about 60 percent of what they took out and have put the balance back in their SSB accounts, Riveire says. The other two have also lost money and "are seriously talking about stopping" their online trading activities, he says.

"These people are not idiots," Riveire explains. "They're successful businesspeople. They just didn't have the discipline to control themselves once they got instant access to cheap trading."

Michael Bennett with A.G. Edwards in West Palm Beach, Fla., warns clients about online trading's impact. "It can be a little more emotional because they're managing their own money." He also asks whether they want to create another job for themselves on top of the job they already have. "I ask them, 'What is your time worth to you, and what would you prefer doing?'"

A Wheat First Union rep who requested anonymity also sees clients tempted by low-cost trades. But most won't move assets to a faceless cyber-entity, he says. "Their concerns are security, and a lack of someone they trust handling it for them when they feel they can't do it themselves."

Given the enormous amount of information available on the Web, clients will indeed come up with their own ideas and information. "Anyone who does will ask, 'What do you think?' and I always reiterate, 'Who's on the other side, and what are their credentials?'" Bennett says.

Question: Are you offering online trading?

As of late summer, Merrill Lynch and Prudential Securities were the only full-service firms that offered online trading. SSB was currently in a beta test with online trading for its fee-based customers. PaineWebber had plans to offer the service in the third quarter. MSDW was reportedly planning to have online trading in the third quarter as well, while A.G. Edwards planned to launch its service early next year.

Riveire says a third of his clients are curious about whether SSB offers online trading. He says clients are anxious to know if they can still talk to him about what they're doing online. "They want to be reassured that they can," he says.

Keller says that when he was talking to a client about Merrill's new Unlimited Advantage account that allows for unlimited free trades online for a flat fee, the client wondered, "If there are no commissions, what incentive do you have to call me anymore?" Keller told the client: "It's in our common interests to make your assets grow. Obviously, the fee increase will be derived from that, but happy clients refer more clients, so there is an incentive."

Many clients are interested in simply knowing whether it's safe to go online to check their account statements. "The average citizen doesn't know what 12 8-bit encryption is," Keller says. He notes that his firm uses the highest grade of encryption available, and that export of such technology is prohibited as a national security issue. "If the encryption is strong enough to be a national security issue, then I feel comfortable it's good enough for clients' accounts," he says.

Question: I'm looking for information. Where should I go on the Internet?

Peter Prentiss, a Prudential broker in New York, admits he's a "techie" and enjoys sharing his favorite sites with clients-Yahoo Finance, CNBC and CBS Marketwatch. "[The sites are] always changing, and I'm always finding new stuff that's better," he says. "Once we get into discussions, we share sites for charting, chat rooms, research or news updates."

TAGS: Archive
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish