Discount brokerage firms have gained significant market share by relying on the Internet as a delivery channel, primarily for on-line trading.
Meanwhile, full-service firms have taken a more conservative approach, offering only limited information on-line as they struggle with trying to answer the organizational, structural, and compliance issues.
The full-service firms' lag has contributed to their eroding market shares, but as more of them hit the Internet, the landscape for on-line brokerage can be expected to change significantly.
To differentiate themselves, these full-service firms will need to leverage several of the Internet's key capabilities, including greater mobility and accessibility of data, providing real-time data, improving efficiency, and channeling and filtering information for the customer.
Of course, to capitalize on these capabilities, full-service firms will have to redefine - and even recreate - their process models.
Several full-service brokerage firms have made great strides in defining these new Internet/ intranet processes, including Smith Barney with its Next-Gen applications and Merrill Lynch's Trusted Global Advisor applications.
Each of those focuses streamlining several crucial operating processes while improving the quality of services and information. Each process needs to be evaluated against four criteria to determine its priority status in the firm's Internet transformation:
Response time and immediacy. How fast does the user need information? Is real-time data required?
Information sharing. Is there a need to share results with others? Do others need access to the information to perform their own analysis, or is a hard-copy report adequate?
Ability to reduce cycle times. Will the Internet have a profound effect on processing time?
Decision complexity. Do results require further manipulation? Does the process use multiple sources of information to yield a meaningful answer?
Five processes for retail brokerage meet all these criteria, with each one crucial to overall business direction: client management, information delivery, portfolio modeling, on-line trading, and operational statistics.
Client management includes the acquiring, maintaining, and strengthening of client relationships. Traditionally, full-service firms have acquired clients through either direct marketing or referrals. With Internet-based automated filtering, a full-service firm can target direct marketing campaigns more effectively, measure their success, and ensure the appropriate follow-up.
Maintenance of client accounts is generally a non-value-added process that distracts brokers from their principal client relationships. The Internet provides a convenient method of self-directed account management by investors.
Without the Web, if clients want to change their address, they must call the broker. An Internet-enabled client maintenance process makes a conversation unnecessary.
Information and the clients' ability to act on it are the key differentiating factors for full-service brokerage firms. The first half of the equation is the delivery of information to the client. At full-service firms, this information is generally channeled to the broker in the form of research, news, or alerts.
Most firms inundate their sales forces with information tailored to a general audience. The Internet's ability to filter and target makes it a far more powerful and potentially effective distribution channel.
A decision to change a stock assessment can take several days to filter out to brokers, who may or may not have client positions in the stock. Sometimes the data does not reach the intended audience at all.
A number of firms have tried to address this problem by sending an companywide e-mail each morning to announce any major changes in research opinions. But these mass messages are often ignored, or if they are noticed it takes time for the affected brokers to determine which clients to call.
The Internet offers the ability to quickly profile a client and match the findings with modeling techniques that rely on the passing of timely information.
Most current portfolio modeling is done on an ad hoc basis with minimal automation. By relying on an intranet, firms can link investment strategists and research analysts with the client portfolios, and investment recommendations can be quickly disseminated.
On-line trading is the most direct way to give clients the ability to act on information provided by a brokerage firm. Quite simply, on-line trading is efficient.
The days of the order ticket are not gone. Many firms still process the majority of their transactions manually. Internet-based automation of order entry may be the easiest opportunity for early success with the Internet. And it lets the firms conduct business regardless of their location.
The ability of the Internet to track the usage and demand for products and services lets brokerage firms manage the profitability of their products and services more effectively. These statistics can answer such questions as how many times brokers use data provided by vendors and which brokers are using them. The Internet's tracking capabilities also let firms determine the demand for securities, allowing them to improve their inventory of high-demand products.
Competitors that fail to understand what the Internet can deliver will continue to lose market share to those who have seized "early mover" advantages. The opportunities for efficiency and improved service through Internet reengineering of high-priority processes are compelling and can let the full-service firms recapture lost ground.
