Volatile Markets Force Online Brokerages To Alter Business Models

by Philip Morton, Investors Offshore.com

12 July 2001

According to a survey of leading full-service and discount online brokerage firms released yesterday by Deloitte & Touche LLP's Financial Services Industry practice, the average activity in online accounts has declined 42 per cent as investors are taking a more conservative approach to their portfolios because of market volatility.

This year's participants in the survey have cited the change in investor psychology as their primary concern. The survey indicates that online brokerages are responding by changing their business models to provide investors with financial information and advice, quality customer service, an array of products and innovative technology to gain competitive advantage, thus making the differences between them less distinct and quantifiable.

'Competing on price isn't enough anymore,' said George Simeone, a partner in Deloitte & Touche's Financial Services Industry practice. 'The bear market has caused online securities firms to change their focus from generating trading volume to capturing longer-term investors with high-value accounts.'

The core findings of the Deloitte & Touche Online Securities Trading survey are based on responses from 40 senior managers at leading full-service and discount online securities firms. The majority of participants said that discount firms are being forced to compete based on quality customer service and breadth of products rather than just cost.

Investors appear more interested in professional support to manage the fluctuating market conditions than they were a year ago. While 83 per cent of full-service firms offer this capability, only 31 percent of discount firms can provide the same.

The survey's results suggest that discount firms are seeking to differentiate themselves from their full-service competitors by offering innovative technology. A larger percentage of discounters, compared to full-service firms, now offer wireless access, streaming quotes and electronic communication networks (ECNs).

In addition to customer service, financial advice and technology, the survey results revealed a number of additional issues and trends such as changing SEC requirements which affect customer protection. Firms are also grappling with various new tax considerations given their charge to expand internationally and these are a prime concern for online brokerages.

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