The ongoing equity markets rally, accompanied by the long-awaited return of retail investors, might lead you to believe that discount brokers are readying waves of new creature features and services to inextricably lock self-directed investors into the low-cost Internet channel.
Well, once burned, twice forewarned.
Understandably, discount brokers are taking a more conservative approach to site enhancements despite a 20% run up in the broad market indices over the last few weeks. They're focusing on here and now improvements related to site usability and performance and are feverishly delivering online enhancements that keep their most profitable active traders from bolting. Moreover, they're refraining from more sophisticated portfolio and retirement planning -- bells and whistles that have historically proven to be a tough sell to even the most sophisticated online investors.
During our research into the Q2 2003 Internet Broker Scorecard, we asked discount firms several questions related to whether they intend to add or enhance functionality tied to their online offerings. We received a tremendous response -- 18 of the 20 Scorecard firms responded to our entreaties.
For instance, planning tools, which in good times were a big-time discount broker fixation (the result of over-hyped consumer demand) are no longer on the short list. In fact, they are a short-term (over the next three months) enhancement priority at only 18% of those firms which responded to our survey. Yet, while 53% of those polled are planning long-term planning tool enhancements, no firm acknowledged having this initiative on their roadmap for this year.
In contrast, 67% and 61% of those polled respectively said site usability and performance enhancements would come to fruition during the next three months. Moreover, 41% said they would be bringing out updated active trader functionality within the next three months, extending recent forays launched during the last few years to keep happy, healthy and loyal the only retail market segment consistently buying and selling.
What follows is a drill-down on some of the key initiatives.
Site Usability, Performance And Active Traders Dominate
It is apparent that firms are focused on making their existing tools and information services work better -- and smarter -- for existing customers. Most firms offer the same core capabilities -- differentiation ultimately results from making things work better.
Over 90% of Scorecard brokers plan to enhance Web usability within the next year. It is no longer whether a firm has alerts or screening tools but how well these tools are integrated in the customer experience. For example, Wells Fargo offers asset allocation alerts as part of its asset allocation tools, which are directly on the account overview page rather than being buried in a typical planning section.
The same goes for Web site performance -- over 70% plan to enhance the speed and reliability of their online presence over the next year. Brokers are paying particular attention to the speed and reliability of their online services to ensure a Web experience that is consistent with user expectations. After several years of expanding site content and functionality, firms are now investigating how site performance affects the accessibility of these bells and whistles.
Active trader services remain an area of investment -- almost 60% of the surveyed Scorecard firms expect to enhance trading services for their most engaged customers. For example, Fidelity recently replaced its ill-fated PowerStreet Pro with Active Trader Pro, a software-based online trading platform that closes the functionality gap on advanced active trader suites found at E*Trade and Charles Schwab.
Portfolio Performance Needs Unresolved
Self-directed brokers continue to focus on providing better information to customers. One step in that direction is enhanced portfolio performance information. Currently, E*Trade is the only firm that lets clients compare historical account performance versus an index, a service advantage the firm has enjoyed since 2000.
Significant work, however, remains to be done in this area across the industry. Over 70% of firms intend to roll out automated portfolio management tools during the next year. It comes as no surprise to see firms getting tax-lot accounting functionality in sync with portfolio performance (all 18 responding firms currently have plans to add or enhance both over the next year or sometime down the road) since one feeds off the other.
Third-Party Research Comes On Strong
Over 40% of the firms surveyed expect to enhance their ability to add third-party research replete with some form of rating. This compares with 18% of firms polled which intend to upgrade institutional research offered online.
In fact, 53% of those surveyed said they had no plans at all to do anything at all related to institutional research. That's not surprising given recent conflict of interest issues that have undercut the perceived value of sell-side research. Firms such as TD Waterhouse, Schwab and Fidelity mix sell-side with third-party research.
Despite the recently abated market slump (which kept retail trading volumes well below historic highs), self-directed brokers are enhancing their online capabilities to meet gradually improving self-directed online investor activity. The immediate focus on site usability and performance reveals that firms are doing their best to improve what they have while avoiding larger spends on items such as portfolio performance and tax-lot accounting.
Dan Burke is a Gmez vice president of research specializing in online brokerage services at Gmez, Inc., an Internet benchmarking and improvement strategies firm in Waltham, MA. He can be reached at [email protected].