Are Brick-And-Mortar Alliances For Online Brokers Inevitable?

Last week, following a supposed off-the-cuff remark made by E*Trade’s Chief Executive Christos Cotsakos, rumors flared that online brokerage E*Trade Group, Inc. might soon strike up some type of alliance with a brick-and-mortar financial firm.

The comment was reportedly made at the close of a meeting on Wednesday with some analysts. Although Cotsakos didn’t go into the particulars of such a deal, he reportedly told the analysts that the move would happen within the next several months.

Concept Is Appealing

E*Trade competitors Charles Schwab Corp. and TD Waterhouse Group, Inc. are already pursuing such combinations.

Some observers feel that this move makes sense, especially in light of recent findings revealing the poor service online brokers have been delivering to their clients.

Poor Service

While online brokerages will manage a hefty $3 trillion (US$) by 2003, the industry continues to lag far behind other e-commerce players in delivering prompt service to their customers.

After contacting 125 leading Web sites from five business sectors, Internet market researcher Jupiter Communications found that only 39 percent of the financial service sites responded to customer inquiries within 24 hours. It took two days before another twenty-five percent of the sites replied to customers, and 10 percent of the sites took up to five days to get in touch with their clients.

But the biggest example of the sites’ poor customer service was the fact that 25 percent of the firms didn’t respond at all.

Jupiter added that this service gap is a serious problem that the online brokerage industry must address if it hopes to keep up with the skyrocketing demand for buying stocks online. Jupiter predicts that households trading online will grow from 4.3 million in 1998 to more than 20.3 million in 2003.

However, the number of trades and commissions per household will drop, because those with less income will also be trying their hand at online trading. The mean income of household trading online is predicted to drop from $62,000 in 1998 to $55,000 by 2003.

Uneasy Alliance

Based on this report, it’s easy to understand why online brokers would be tempted to hook up with their brick-and-mortar counterparts — in an attempt to broaden their service capabilities. But I think it would be easier to mix water and oil.

The problem I see is simply a fundamental conflict of interest. While the big brick-and-mortar brokers may be amenable to such an arrangement now, I believe that it is only a matter of time before they’re either forced to scrap their army of commission brokers — or gobble up the E*Trades of the world.

What appears to be a quick fix for the problems facing online brokers could end up contributing to their eventual absorption or demise.

What do you think? Let’s talk about it.