Full-Service or E-Service?
If you believe what you read in the newspapers and see on television news, you're liable to think that full-service brokerage firms are as much of a thing of the past as buggy-whip manufacturers.
The nation's business press is full of stories detailing the exciting rise of on-line trading. Companies such as E-Trade and AmeriTrade have catapulted into national prominence with the ease of trading stocks electronically. Discount brokers such as Scottsdale Securities and Charles Schwab advertise a flat fee of $7 or $8 for any trade. Executives of the New York Stock Exchange, the American Stock Exchange and NASDAQ are mulling 24-hour trading so investors can trade on-line day and night.
Late in October, NASDAQ announced that it was creating on-line brokerage links that would allow investors to go directly to their on-line trading accounts. The NASDAQ web site registers a whopping 23 million hits a day, an indication of the growing popularity of on-line trading.
The day of trading stocks through a brokerage house is over, day-traders will tell you. No longer does an investor require the services of a broker to research companies, provide analysis to clients, execute trades and manage portfolios.
Think again. Contrary to public opinion, not everybody out there in the Indiana investment community is wedded to the computer, trading stocks, bonds and pork belly futures over the Internet. A healthy number of Hoosier investors still value the advice, personal service and investment direction that they get from a full-service broker. And Indiana's brokerage firms seem to be doing just fine, thank you, serving investment clients that many have known for generations.
"There's an obvious answer to why people still rely on a full-service broker and some not so obvious answers," says Russell Bauman, senior vice president and branch manager of David A, Noyes & Co. in Indianapolis and a 31-year veteran of the Indiana brokerage business.
"Many people just want the advice of a trained broker," Bauman says. "Some people just want to take advantage of the ideas, fundamental research and trade momentum that we offer." A full-service brokerage house, Noyes is a New York Stock Exchange member and has been in Indianapolis for more than 50 years. With 70 brokers working out of offices in Indianapolis and six cities in Illinois and Wisconsin, Noyes has the expertise to work with a wide variety of investment clients.
Although the firm is headquartered in Chicago, L.H. Bayley, Noyes' chairman, works out of the Indianapolis office. The firm's OTC Trading Group, Municipal Bond Department and Financial Institutions Group are all headquartered in Indianapolis. About 45 people work in Indianapolis, and 28 of those employees are full-service brokers. "Our brokers keep track of news events that will impact the market," Bauman notes. "We can give clients real-time information, and a lot of times, we act as our clients' conscience. We're trained to ask if a particular stock will fit a client's personality, especially from a risk standpoint."
Peerson & Co., a small brokerage firm in northwest Indiana, does allow its customers to trade on-line. Jim Kocon, a broker in the firm's Whiting office, says that "if a client is knowledgeable about the market, they'd frequently be better off e-trading. But if you don't know how to pick good companies, good stocks, then you definitely need the services of a broker."
With volumes of information on stock companies now available on the Internet, a lot of people have become confident that they can handle investing on their own. "We are no longer the gatekeepers of information," acknowledges Mike Bosway, CEO of Indianapolis-based City Securities Corp. But for many, there's actually too much information out there. "Information is not necessarily knowledge," Bosway says, pointing out that a good broker digests and filters information and helps clients sort through what's really important and what is not.
On-line traders, Kocon adds, also need to be fluent in the on-line world and in the use of their computer. E-trading is "great if you know what you're doing. But if a person doesn't know what they're doing online, then they can get hurt."
A subsidiary of American Trust & Savings Bank in Whiting, Peerson has six full-service brokers in Whiting and Grown Point. The firm has been in business for 44 years.
Kocon notes that market volatility and many investors' short-term market outlook almost dictate that clients consider using full-service brokers. "A full-service broker has to be wired into what's happening," he says. "If you've got a day job and can't constantly be watching the market and watching the news, then you need a full-service broker."
The bull market of the late 1990s has given many investors a false sense of security, Kocon says, adding that "a lot of people make money in the market because the market is going up. They've been lucky. But you shouldn't think you don't need a broker, because the market goes down, too."
Rick Harrison, chief operating officer at Harrington Wealth Management in Fishers, echoes that sentiment. "In buying stocks over the course of the last 10 years, there have been very few wrong places to go." But when bulls turn to bears the going gets tougher for those going it alone. "That's where an adviser is going to add value."
Kocon also notes that with on-line trading, it's just too easy to "push that buy-sell button. One of the jobs of the good broker is to calm the clients' emotions. We have to be an emotional agent." Kocon says choosing that good broker is the trick. He advises clients to test a prospective broker out first. "Ask them what they think about the market," he says. "Ask for recommendations. Follow how their recommendations do for a couple of months."
The acid test of how good a broker is involves his or her ability to make money for the client. "If the broker can't beat the market, he or she is not the one for you," Kocon says. "Go with index mutual funds instead. A broker has to be able to beat the market."
Jim Oxley, senior vice president of Raymond James and Associates and manager of the firm's branch in Greenwood, says that an investor "has to know more than how to turn on a computer to invest." Oxley says he thinks "the glamour of on-line trading is exciting," but he points out that once an investor reaches a serious amount of money in his or her brokerage account--$100,OOO, according to some industry studies--"most investors feel like they want someone with them."
Harrison, whose Harrington Wealth Management is a subsidiary of Harrington Bank, also comes across clients lured by the excitement of on-line trading, and says there can be a way to have the best of both worlds. For those who find e-trading "a fun thing to do, we set aside a small percentage of funds and let them play with that." The rest of the client's funds remain under the watchful eye of the company's financial advisers.
Oxley adds that the financial advice provided by a full-service broker can help an investor with two of the more critical aspects of investing, tax consequences and asset allocation.
Mark Willis, president of Irwin Union Securities in Columbus and Carmel, maintains that much of the media attention paid to on-line and discount trading is perception rather than reality. Willis points out that "because of newness, on-line trading tends to get a lot of publicity. Speculative trading gets a lot of press coverage, a lot of attention."
Still, he says, there are three realities to the technological revolution sweeping the brokerage business. "The Internet is here to stay," he says. "Business is still trying to figure out how to use it. And for every trend, there's a counter-trend."
Willis notes that the days of paying a fee to execute a trade are likely to end. Commission schedules for full-service brokers are generally proprietary and vary widely. Most full-service brokers do have the authority to discount trading fees, and many brokerage houses are moving away from transactional costs to an asset-based fee, much like bank trust departments charge for managing the trusts in their care.
Brokerage firms are trying to determine what consumers will pay for, and Willis says he thinks "the investor will be willing to pay for planning, advice and oversight." He adds that high-net-worth investor clients "are very, very busy people. They often work 10 to 12 hours a day. They're willing to pay a broker for advice, just as they pay a doctor for advice."
Meanwhile, Gary Lents, vice president and regional manager of NatCity Investments in Indianapolis, says his firm is "not sticking its head in the sand" when it comes to online trading. NatCity is a mid-sized regional firm wholly owned by National City Bank. "We currently offer our customers on-line access," says Lents, adding that NatCity will roll out an on-line trading function in the first quarter of 2000. "We're putting into place a system similar to that offered by Merrill Lynch. We'll give our clients investment advice and help with the execution of trades."
NatCity's foray into on-line trading is a continuation of a trend that began 18 months ago. Already, most of the major brokerage houses--including Merrill Lynch, Dean Witter and Morgan Stanley-have begun to offer clients access to on-line trading services, although coupled with the financial planning and advice traditionally offered by full-service firms.
That competition will likely spell difficulty for on-line brokers like E-Trade Group and AmeriTrade Holding Corp. Stocks of on-line brokers have plummeted since summer and even venerable Charles R. Schwab--the king of the discount brokers--has watched its margins erode during 1999.
Right now, it's an open question whether the Internet will irrevocably transform the brokerage industry. But few Indiana brokers have plans in the near future to retrain.
Lents sums up the full-service brokerage industry's position on on-line trading. "There are all kind of nuances to trading," he says. "You've got to have experience at it. It takes a lot of expertise to learn how to trade a stock."
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|Publication:||Indiana Business Magazine|
|Article Type:||Brief Article|
|Date:||Dec 1, 1999|
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