Discount brokerages catch on with people who pick their own stocks
If you are an investor, the chances are good that sooner or later a discount brokerage house will try to entice you to move your account. The discounters, who lop off from 40 to 70 percent of the customer's cost in a securities transaction, are slowly capturing a larger share of the retail securities market. In 1981, discounters represented 6.3 percent of all retail commissions; last year it was 8.4 percent. And the expansion should continue, probably at an even greater rate. Last year some 600 banks and thrifts announced plans to enter the discount brokerage business. As the banks enter this business , it will expand.
For the most part, the lure of lower commissions is what attracts people to the discounters. Roger Servison, vice-president of Fidelity/Source, one of the discount brokerages, says the lower-cost accounts are for the ''person who is active in the stock market but not using his or her stockbroker as a source of information. It's for people who do their own research, or subscribe to a service providing them with ideas.'' Or, as James W. Fuller, a senior vice-president at Charles Schwab & Co., another discounter, notes, ''If an individual has a stock option from his company and wants to sell it to raise cash, he doesn't need advice from a broker, he can use a discount broker.''
According to David M. Brownstone, co-author of a book entitled ''Personal Financial Survival,'' ''People should use discount brokers every chance they get.'' He adds, ''There is no point in using a more expensive broker unless he is handling a good many other financial matters beyond buying or selling stocks. If he is just executing trades, he should get the least expensive brokerage commission he can.''
Discount brokers attract not only those who do their own research, but also a relatively well-heeled group of individuals. According to an unpublished study done for the discount brokerage industry, some 91 percent of its customers are men, 50 percent are 55 years or older, and the average customer has an income of are retired and and 1 out of 5 is involved in top managment. Customers listed long-term growth and capital appreciation as their main goals in investing.
Schwab is unique in that it can claim it remains open 24 hours a day, seven days a week. Through a toll-free number, a sleepless customer can call Schwab and place orders for the next day's trading. Not even Merrill Lynch offers that kind of service.
And, as Schwab found out during one of its surveys, 43 percent of its customers have more than one brokerage account. This second account, Mr. Fuller notes, was most likely with a full-service brokerage house.
To attract customers, the discounters must advertise almost constantly. In the past, these ads have included comparisons of their commission rates. Recently, however, the brokers have eliminated their rates from their ads. So how does an investor find out how the brokers' rates stack up? Thomas Quick, a vice-president of Quick & Reilly, another discounter, answers by comparing two New York-based department stores. ''How do you know the difference between merchandise at Bloomingdale's compared with Abraham & Strauss? You must do your homework.''
To determine price differentials between the major discounters requires knowing what your average trade is likely to be. According to Mr. Servison of Fidelity, the ''typical'' trade at his brokerage house is for 300 shares of a $ 35 stock. At Merrill Lynch, the commission on this trade would be $191.69; at Fidelity Source, the commission would be $87.36; at Quick & Reilly, the trade would cost $83.50; and at Schwab, it would cost $88.50. If an person does one trade a month, Mr. Servison says the savings would allow him to subscribe to a market letter with a good track record.
Cost is not the only factor in determining where to set up a discount brokerage account. Execution is at least equally important. Mr. Quick comments, ''If you don't get good execution, there's no sense in setting up an account.'' If customers are unhappy, Mr. Quick adds, he handles their complaints himself.
Gauging execution before setting up an account is difficult, however. Naturally, all of the discounters claim they have the best execution. Mr. Fuller notes that ''most of our trades are executed in 30 seconds or less.'' And Mr. Servison says many of his company's customers have their orders executed while they are on the phone. Unfortunately, there is no way to compare them. The Wall Street Journal at one point tried to compare them, but the experiment was unsuccessful.
Mr. Quick, a competitor, says it is ''no secret'' Fidelity/Source had computer and back office problems when it merged in October 1981. One customer, for example, was miscredited with $50,000 in Treasury notes he didn't own and found it difficult to get Fidelity to take the credit back until he told them to send him the interest. He eventually moved his account to another discount broker.
Mr. Servison also says the process of merging Fidelity and Source Securities was complicated and took a lot of ''debugging.'' ''We are running smoothly and efficiently now,'' he maintains.
At most discount houses, individuals are given a phone number to call that connects them directly with traders. At Quick & Reilly, however, an individual is assigned to a broker. Mr. Quick says this gives ''a personal touch,'' lacking at the other brokers. But Mr. Fuller of Charles Schwab says this is because not all Quick & Reilly brokers have computer terminals in front of them. Mr. Quick says his system is more efficent and doesn't waste hisregistered representative's time.No matter whom you call, don't expect to get advice. As Mr. Fuller notes, ''Our RRs (registered representatives) can get fired if they give advice.'' In fact, the Securities Industry Association, in a long report on discount brokers, says the main difference between full-service firms and discounters appears to be ''. . . the retail RR's investment advice and sense of market timing.'' The full-service brokerage houses, in an attempt to bind customers to them, have added various forms of asset management and credit availability.
The discount brokers offer a limited range of services. Most specialize in providing low-cost services to buy and sell stocks. All of them provide trading in bonds and options. The commission rates on buying or selling options might actually be cheaper with a full-service broker, though, since the commission at a large wire house is often based on the value of the trade. At a discount house , there is usually a minimum commission of about $40.
Unlike full-service brokers, discounters don't offer limited partnerships - an area of increasing interest among investors. And the discounters usually don't participate in initial public offerings or secondary offerings. But many do sell municipal bonds, including the popular municipal bond unit trust. At Fidelity and Schwab, investors can have a type of cash-management account. Such an account is not offered at Quick & Reilly.
Like the full-service brokers, most of the discounters are covered under the Securities Investors Protection Corporation.