DLJ Direct's Chief Seeks Richest Net Users

K. Blake Darcy, chief executive officer of DLJ Direct Inc., has a long agenda, but morphing the firm into a bank is not on it.

The founder of one of the first electronic brokerages says his company will continue to add products-home loans, insurance, and the like-but only as accessories to its core investment service.

"I'm not a huge believer in this automatic cross-selling opportunity," said Mr. Darcy, 42, who started DLJ Direct in 1989. "I think it's important to have these other services, but I also think that if the traditional insurance firms and banks implement well, they'll continue to get the bulk of that business."

DLJ Direct is one of a growing number of on-line intermediaries that banks are eyeing warily as potential customer siphons. Electronic brokerages-which let investors trade stocks on-line at discount prices-have captured the fancy of a large group of Internet users, and swelling customer rosters have prompted these companies to add products and services.

This popularity has led some observers to sound notes of caution. Initially on-line brokers "are going after the low-hanging fruit, which is active brokerage customers," said Bill Burnham, an electronic commerce analyst in the San Francisco office of Credit Suisse First Boston.

Mr. Burnham predicts that on-line brokers will use these relationships to "cherry-pick the banks to death." Brokerage accounts provide the same type of relationship "glue" as checking accounts at banks, Mr. Burnham said.

As a group, banks have lagged their brokerage peers in offering on-line trading. Those that have ventured into Internet trading have done so not necessarily to compete with firms like DLJ Direct or E-Trade Group, but in an effort to serve their customers better.

Mr. Darcy said DLJ Direct's target is more specific than that of most of the 80 or more on-line brokerage competitors: to become the favored choice of the wealthiest Internet users.

DLJ Direct recently formed a "select client group" for people with $1 million or more invested. These customers have "several people assigned to their account" who will call with stock advice, Mr. Darcy said. There are price breaks and other special offers.

The select client group "has been a very high-growth area for us," Mr. Darcy said.

Some of these customers get house calls from dedicated representatives.

"It's more like a traditional brokerage relationship," Mr. Darcy said. "You know who you're dealing with on the other end of the phone, but you get lower rates than even our regular discounted customers."

DLJ Direct, based in Jersey City, is the on-line division of Donaldson, Lufkin & Jenrette Inc., the investment firm that in turn is owned by Equitable Cos. and Paris-based Axa Group, a diversified insurance company.

Donaldson Lufkin is weighing greater independence for the electronic brokerage and has said it will decide imminently whether to spin off a part to investors.

Being able to offer Donaldson Lufkin research has been a boon for DLJ Direct, Mr. Darcy said. But being part of a larger firm "can sometimes slow some of your efforts" to innovate.

Customers of DLJ Direct can initiate trades, read analysts' reports, and invest in initial public offerings handled by Donaldson Lufkin.

DLJ Direct charges $20 per trade, plus 2 cents for every share over 1,000. Its prices are lower than Charles Schwab's but higher than E- Trade's.

"There are huge cost savings in on-line trading, but beyond that there are great benefits of information gathering and collection analysis that you can't do in the more traditional way," Mr. Darcy said.

By contrast, he said, on-line shopping can be less convenient and more costly than in the physical world. With financial services, "clearly there is greater value being delivered over the on-line channel," Mr. Darcy said.

Mr. Darcy said his unit is "totally separate" from Donaldson Lufkin, which has a "small retail arm" that focuses on "very high-net-worth individuals" who "rely more on bricks and mortar than electronic commerce."

Generally speaking, on-line brokerages appeal more to entrepreneurial types who prefer the self-directed approach.

But customer demographics are changing as the Internet grows in popularity. Mr. Darcy said more women and older investors are signing up.

"The individual investor is getting more and more active every day," Mr. Darcy said, partly because of the growing popularity of "day trading," the subject of some recent how-to books. "I can't go out to dinner in my hometown without having the table next to me talking about Yahoo or Amazon," he said.

Mr. Darcy said he expects some insurance products will be offered on his Web site, which already offers mortgages through a partnership with E-Loan Inc.

However, "I don't think people will start thinking of us as a bank or financial services firm-they'll think of us as an on-line brokerage firm that offers other types of services," he said. "If those services are competitive, then we may get their business."

DLJ Direct is often lumped with E-Trade and Charles Schwab & Co.'s on- line services. Mr. Darcy said his company's focus is not the same, nor is it racing to sign up the most customers.

"We're going after the high end; they're going after the mass market," Mr. Darcy said. "It's not that we won't take some of their customers, and they won't take some of our customers over time."

According to a survey by Credit Suisse First Boston, Charles Schwab was the on-line leader in the third quarter of 1998, with a 29.9% market share. Next came E-Trade (11.1%), Fidelity (9.3%), Waterhouse (9.2%), Datek (8.6%), Ameritrade (7%), DLJ Direct (4.3%), Quick & Reilly (4.3%), and Discover (3.8%). All other brokers combined for 12.5%.

Mr. Burnham said Schwab has "typically been the high-end player in the market" but DLJ Direct's "active courting" of wealthy investors is "unique."

Though this strategy is not necessarily the most profitable-people with lots of assets do not necessarily make the most trades-Mr. Burnham said it is a good way for DLJ Direct to distinguish itself.

Mr. Darcy said the larger-volume companies "get a lot of first-time investors." By contrast, "we're trying to get the people who are currently at the full-service firms, or they're at one of the mass-market discounters and want a higher level of service."

DLJ Direct is competitive on price, he said, and is typically rated higher on customer service than Schwab and E-Trade.

Decade-old DLJ Direct has 530,000 customers, Mr. Darcy said. By comparison, E-Trade announced in late December that its Destination E-Trade site had attracted 500,000 customers just since September. E-Trade has also announced a high-profile advertising campaign.

Mr. Darcy is not perturbed. "Mercedes doesn't necessarily spend as much (on advertising) as Chevrolet, but Mercedes does just fine," he said.

DLJ Direct is about to introduce an ad campaign designed by New York agency Kirshenbaum Bond; ads will probably appear in magazines and on television shows that appeal to wealthy investors.

"You won't see us on 'Friends.' You won't see us on 'ER,' Mr. Darcy said.

Possible stumbling blocks could include a downturn among Internet stocks or a falloff in the Dow Jones industrial average, Mr. Darcy said.

"The danger is that in a sustained down market, you begin to see investors start to sit on the sidelines," he said. "That is deadly for an on-line brokerage firm."

Other potential threats are the traditional full-service brokers such as Dean Witter and Merrill Lynch & Co. - "if they could ever figure out an on- line strategy that could compete with us," Mr. Darcy said.

Mr. Darcy joined Donaldson, Lufkin & Jenrette from Lehman Brothers in 1984 as a retail broker for high-net-worth customers.

In 1988, he conceived of an electronic brokerage service and wrote a business plan for what was then called PC Financial Network. It was launched the following year on the Prodigy on-line network.

Many skeptics considered the project "a silly exercise," but "I was really convinced that this was something that would work," Mr. Darcy said. "Not in the short term-we knew there weren't enough people who knew how to use a computer, could afford one, and knew how to get on-line."

After the Prodigy debut, Mr. Darcy made a similar deal with America Online. Trading volume "really started exploding-and then, of course, the Internet changed everything."

Alexander Stein, a principal with Gomez Advisors Inc. of Concord, Mass., said DLJ Direct set a standard in electronic brokerage, but other companies have begun to catch up.

Gomez issues a quarterly ranking of electronic brokerages; DLJ Direct held the top spot last year but has slipped to second place.

"The industry has continued moving forward, and (DLJ Direct's) product hasn't moved forward as much," Mr. Stein said.

E-Trade, now No. 1, launched more portfolio monitoring, access to IPOs, and other features that "inched E-Trade ahead," Mr. Stein said.

He predicted that DLJ Direct would introduce "something new to the market" shortly. "If they don't, they will be falling behind." Electronic brokerage "seems to be a game of leapfrog-everyone falls behind, then some catch up."

Mr. Darcy said he spends half his time on international expansion plans. DLJ Direct is planning to enter the United Kingdom in the second quarter. "We're using the infrastructure that DLJ already has in London, both the broker-dealer and the back-office infrastructure, which will give us a very big advantage," Mr. Darcy said.

At the same time, the company will enter Japan in a joint venture with Sumitomo Group.

England and Japan "are the second- and third-largest markets for these types of products and services," Mr. Darcy said. "We're certainly going to be looking more closely at the rest of Europe and at Hong Kong.

"We're not going to be everywhere, because there aren't investors everywhere, but we're going to focus on the top markets."

Mr. Burnham of Credit Suisse First Boston said overseas markets may bear fruit over the long term, but domestic growth is more important.

"Most foreign equity markets are nowhere near as advanced as the U.S. equity market," he said. "If you're not competitive here, you're not going to be competitive abroad."

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