TD Waterhouse avoided a lawsuit from Charles Schwab yesterday by issuing a public apology for a negative portrayal of the firm in its ads. The underlying truth: These are trying times for the online brokerage industry.
The two rival online brokerage firms were headed to court after Schwab filed a suit against TD Waterhouse for an ad campaign, begun in November 2003, attacking Schwab’s pricing and customer service. Actor Sam Waterston, of Law & Order fame, tells viewers to “switch to TD Waterhouse, the alternative to higher-priced brokers like Merrill and Schwab.” He also asks, “Why pay all that money to Merrill Lynch or Schwab?”
Not only did Waterhouse kill the campaign, it apparently never worked. According to Active Trader Update 2005: The Race for High-Revenue Clients Heats Up, a new report from Celent, a Boston-based research firm, Schwab is the only firm that has not seen daily average revenue trades (DARTs) fall below December 2004 averages. In April, according to a Keefe, Bruyette & Woods report, Schwab reported DARTs of 182,000, a 7-percent decline for the month—beating KBW expectations by 8 percent—and an 11-percent increase year over year.
On the other hand, Waterhouse’s DARTs fell 16 percent in April and are struggling in May, according to KBW. But while Schwab is being pummeled less by the slow trading activity, the online brokerage business is in trouble for the near term: Celent expects overall trading activity to improve only slightly over the next couple of years—that is, if the market performs well. If the market performs poorly, there will be no growth or a slight decline in the number of households trading online at least once a year.
For financial advisors, this is good news. Most investors understand the value of advice. Since 1999 the percentage of investors who are “soloists”—those that make their own investment decisions—has decreased 27 percent, according to Celent. At the same time, “validators”—those who collaborate with advisors to make investment decisions—increased 25 percent.
Todd Buechs, an analyst at Sanford C. Bernstein, said the Waterhouse ads were bound to result in a strong reaction from Schwab. “Chuck just took over. He’s become the firm again, and he’s in the middle of a complete makeover—attacks on his name weren’t going to fly,” Buechs says.
However, the message is simple: You’re paying too much for service at firms like Merrill and Schwab. But according to April trading revenue data, Schwab is apparently doing a better job of satisfying customers than Waterhouse. “It would seem TD is trying to just hang on,” says Buechs.