Online Trading Sounds Death Knell For Brokerages

As low-cost online investment firms such as E*Trade and Ameritrade, Inc. continue to lure investors away from the brick-and-mortar brokerages, many industry observers believe that it is only a matter of time before the traditional pillars of Wall Street become obsolete.

In fact, the pressure is so intense that many big name brokerage houses are being forced to offer a wide range of online services for a fraction of traditional commissions.

Legions of investors who used to pay their personal broker hundreds of dollars (US$) for a single trade have opted to use their PCs to do it themselves via the Internet for $10 or less.

Traditional Brokerages Slowly Going Online

Despite the obvious shifting paradigm of the brokerage industry, full-service firms have been moving slowly, fearing that any movement to cyberspace will jeopardize its lucrative brick-and-mortar operation. However, the industry now seems to be doing an about face.

Last Wednesday, Morgan Stanley Dean Witter & Co., the second largest brokerage firm in the U.S., became the latest full-service firm to introduce a tiered fee system for its customers who want to trade online — but also have the option to seek the advice and service of a traditional broker.

Halfway Measures

Under the new program, Morgan Stanley will charge $29.95 for each unassisted online trade and $39.95 for those made with the assistance of a broker.

In addition, Salomon Smith Barney Inc., Merrill Lynch & Co., Prudential Securities, Inc. and PaineWebber Group have all either announced or begun offering similar services with similar commissions.

Still, some analysts feel that the steps these giant brokerage houses are taking are no more than halfway measures that will do little to plug the hole in their dikes.

Additionally, they believe that it is only a matter of months before these same brokerages will be faced with the inevitable and unpleasant task of downsizing their huge work forces.

Value-Added Entrepreneurs

While this unfolding scenario seems to paint a bleak outlook for individual brokers, I think it will also be the catalyst for a new kind of stockbroker, one who will prosper in this changing financial tide.

These new economy brokers will quickly stop looking at commissions as their source of revenue. Instead, they’ll become what I call value-added entrepreneurs.

They will build their customer base by offering individually-tailored investment services that range from educational seminars to individual advice.

The success of their brokerages will be tied directly to the value of the services they provide. The successful ones will partner with each other, and specialization will be a necessity. The days when glad-handing sales people were paid just to “schmooze” unsophisticated investors will be gone forever.

Casualties Will Be Significant

The bad news will be that many of those who are presently employed as stockbrokers simply will not survive. Many of them will deny the truth until it hits them in the face.

The good news is that those who make the grade will deliver exemplary services to a horde of willing investors.

Let’s face it, when consumers demand more for less, someone has to pay the price. After all, who ever said that e-commerce wasn’t a double-edged sword?

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