The full-service e-brokerage (i.e. Merrill Lynch and Morgan Stanley Dean Witter) will come to reign the online trading space in three short years, according to a report issued by Celent Communications, a Cambridge, Mass.-based consulting and research firm. The Celent report says that of the three investor types-directed investors, moderately independent investors and mainstream investors-the third group is the one that remains largely untapped. The report portends that by 2003, this group will comprise almost 70% of the entire online investment community. Because mainstream investors demand a level of advice and service that currently only the full-service firms can afford, Celent surmises that these brokerages will garner more than 50% of online assets in the same time period.
While this does not bode well for the "execution players" like Ameritrade, which offer cheap transactions with few added services, and the "brand players" like Schwab, which offer more online tools and research for a premium with a brand name, this paradigm shift will truly erode the client and asset growth of the "value players" like E*Trade, which differ little from the brand players except in their name recognition. As the value players cannot compete in price with the deep discounters-which will carve out a needed niche for the riskier, daytrading set-or in service with the full-service or brand firms, their market share is expected to fall from 28% in 1999 to 6% in 2003.
"For companies like E*Trade, life will be very difficult indeed," explains Marenzi, managing director at Celent. "E*Trade will find itself with only a few options, all of them unattractive. They can make themselves cheaper, competing more with execution players. The other option for them is to move up the food-chain to full service. The problem with that is it is very expensive to build up that expertise and type of network."
This is not to say that Schwab has the luxury to rest on its laurels. Brand firms will only account for 34% of online brokerage assets come 2003, compared with 72% today. Schwab, Fidelity and the like have to focus on moving upstream, says Marenzi. "Schwab is scared at the moment," he says. "You know the saying, 'the bigger they come, the harder they fall?' Simply because of their size, Schwab has a lot more to lose than E*Trade."