Mass affluents, Honoré says (and he’s surveyed them), are technologically savvy, yet they want advice and guidance; “self directed investing is not a popular thing,” he says. “But they still have a self-help mentality, so if they want to check an account balance, they’re not going to call their financial advisor. If they want to look at their portfolio performance, they’re not necessarily going to wait for the quarterly report. These people use the online channels, but they still want to aggregate their assets. Nobody likes to log into eight sites or have eight different financial relationships, it’s just a pain.” The key to Schwab’s and to a lesser extent E-trade’s success has been their ability to offer a wide breadth of products — including mortgages, other consumer loans, online banking, bill payment, and college savings plans — via one-stop, online, do-it-yourself shopping.

Full-service brokerage firms would be well advised to take a page from this book, Honoré believes. “If you talk to an advisor at Merrill Lynch, they’ll do a detailed financial plan, allocate you based on your investment objectives and risk tolerance, and pick funds, stocks, maybe some alternative products to fill that allocation,” he says. “What the discount firms have realized is that this service model is really expensive.” As an alternative, Schwab for instance has created Schwab Portfolios, through which it provides a similar service in an automated fashion online. “It’s a smaller universe with pre-selected funds and stocks and pre-selected allocations, but it services a good chunk of their customers,” Honoré says. “So they’re using technology to substitute some of the functions that financial advisors have been performing. Advisors will say they provide better custom tailoring and they’re better trained, and to some degree that’s true, but the average investor might not need or qualify for that level of service.”

How do these no-longer-discount-but-still-online brokerage firms make money, especially at a time when so much free online trading is available? Through all the extra products they offer, including mortgages and other consumer loans, as well as account fees and margin fees. “Discount brokerage is going away — other than niche active trading, the Scottrade space, the average retail consumer doesn’t need discount brokerage because he doesn’t do that much trading,” Honoré says. “But bringing in companies that understand how to operate on low margins because they’ve had to and that leverage appropriate technology to do something that a full service firm might have multiple humans doing, definitely creates a different competitive environment in the full service landscape.”

A combined TD Ameritrade/E-trade would provide E-trade's tech-savvy strategies to TD Ameritrade’s customers. “This merger potentially brings traditional full service firms another really strong competitor, and they ought to look at how these firms manage to achieve their operational efficiency,” he says.