Toss a new indicator on the pile of evidence that Wall Streets cant-miss days are over: Discount brokerages are raising prices.
TD Waterhouse Group, looking for ways to protect its bottom line without resorting to layoffs, has joined the ranks of brokerages pledging to maximize the profitability of existing accounts by more carefully segmenting its customers and charging some more for services.
In making the shift, TD Waterhouse joins a growing group not just discounters trying to contend with a slower market. FleetBoston Financial Corp., for example, reorganized its brokerage units, and shuttered its deep-discount business. Merrill Lynch & Co., anything but a discounter, realigned customers into more narrowly defined service levels.
For these companies, it seems, market share numbers are out in fact, customer accounts that dont generate profits are out. Discounting, especially in brokerage, has been slashed except where it makes bottom-line sense. Customer segmentation is in, and it is aimed at a new key measure: profitability-per-customer.
TD Waterhouse, which is mostly owned by Toronto-Dominion Bank, said it would look to increase pretax income by $200 million this year and to boost its pretax operating margin by as much 30% through a combination of cost-cutting and revenue enhancements.
The company will look for $50 million of these enhancements to come from higher prices imposed on certain customer segments. Most of the changes are to be in place by the end of the companys fiscal fourth quarter, which ends Oct. 31. The company said profits fell 35% in its fiscal first quarter, which ended Jan. 31.
Revenues have been falling faster than expense realignment, and its going to a take a while to get back in line, said Steve McDonald, chief executive officer of TD Waterhouse, when he unveiled his plan Thursday morning. We dont want to wait for the market to come back, Mr. McDonald told Wall Street analysts at a UBS Warburg investor conference in New York.
It is still unclear just who will be paying more for services at TD Waterhouse.
Some people will pay more, some will pay less, said a spokeswoman, who said TD Waterhouse would use customer segmentation to make every relationship profitable.
TD Waterhouses announcement signaled a shift in strategy in the discount brokerage community, which in the late 1990s competed ruthlessly on commissions in an effort to lure stock-hungry investors. The battle later became a struggle over who would be the best service provider, with some discount brokers offering certain customers access to the same kinds of bells and whistles once only available to institutions on Wall Street.
Now, thanks to the rapid decline of valuations in the equity markets from the highs set in March 2000 by last week the technology-heavy Nasdaq had shed about $3.6 trillion of paper value discount firms are being forced to charge for some of those services.
TD Waterhouse has already begun part of its initiative, cutting commissions for active traders, those who make 36 trades a quarter, from its usual $12 per transaction to $9.95. Others have taken a different tack. In January FleetBoston shuttered its deep discount operation SureTrade Inc., folding it in to its Quick & Reilly brokerage unit and forcing customers to stay and pay higher commissions, or bolt.
A number of moves are possible for TD Waterhouse, said Richard Repetto, an analyst at Putnam Lovell Securities in New York, who said the company indicated to him that it might raise fees for services it already charges for or begin charging for services that are currently free. Ameritrade recently began implementing charges for paper confirms, Mr. Repetto said.
Other cost-cutting measures call for TD Waterhouse to trim $5 million from the $25 million it spends per quarter on advertising. Other cuts are to come from the elimination of paper statements and the cost of mailing them, Mr. McDonald said. Just the provision of online statements and the avoidance of paper and stamps and other costs associated with non-employees is worth $15 million annually, he said.
However, one strategy TD Waterhouse will not adopt is layoffs, Mr. McDonald said, even as nearly every one of his competitors swings the layoff axe. Mr. McDonald said the companys staff will be reduced to about 7,500 without layoffs.
The company employed about 8,180 people at Feb. 1.