To say the Internet has dramatically changed the brokerage industry would be a gross understatement.

Indeed, the book is still being written on the sizable impact the Web will have on financial services.

As the industry comes of age, traditional brokerage firms as well as pure-play Internet companies are grappling with issues such as whether to offer advice or focus on self-directed investors, whether to be a niche player or an everything-to-everybody firm, whether to open real doors in addition to virtual ones, and how to get new customers and keep them from fleeing to competitors.

Online brokerage executives touched on some of these issues during a recent American Banker roundtable. Participants were Tom Quick, president and chief operating officer of Quick & Reilly; Stephen A. Clifford, managing director of interactive marketing and services at Salomon Smith Barney; and David D. Whitmore, senior vice president of Datek Online Brokerage Services Corp.

Clicks-and-bricks is becoming a more popular strategy. Is it viable, and where do you see the most growth?STEPHEN CLIFFORD: We definitely believe in ... clicks-and-bricks. I prefer to call it mice-and-advice because bricks are inanimate objects and really it is the people who are important. The Internet is not just about transactions. It is also a great medium for collaboration, communication, and research.

DAVID WHITMORE: In business school I wrote a paper where I predicted the physical locations of brokerage firms would disappear. But interestingly I think the clicks-and-bricks model has started to show some legs.

This is not a statement that Datek is abandoning the online world and establishing a branch network à la Quick & Reilly. But if it is anecdotal evidence, we've been doing a lot of trade shows recently. What we've found is that our close rate, or our ability to actually open accounts from people who had physically come up and spoken to us, is off the scale compared to a regular rate of closing a new customer into an actual account. It seems to be a very profound relationship thing that goes on when the customer speaks to an individual.

So while we were a firm built around early adopters of Internet technology, there is no question that the idea of a physical presence is something that we see a value in.

TOM QUICK: I don't necessarily think that a physical location means that much to younger investors as it does to older investors. Now, people might not necessarily come in the office, but I think there is a comfort factor of knowing that, if and when they choose to go in, there is someone who is willing to talk to them during business hours.

Will consolidation hit the online brokerage world, as it has banks and mutual fund companies?

CLIFFORD: A lot of firms are overpriced right now. But with several more months or years of the market at these levels, and if transaction volume goes down, I think it will make the price of online brokerage firms much more attractive, and there will have to be some consolidation.

WHITMORE: There are probably some reluctant sellers who would accept current market values. But having seen prices that were dramatically higher just a year or year-and-a-half ago, proprietary owners might say, 'I was worth this much just a year ago. You have to pay me that.'

Quick is with Fleet. TD Waterhouse is with Toronto-Dominion Bank. Schwab and Fidelity are both very large firms in their own right. The banks acquiring large brokerage firms probably will continue.... various barriers to these things have fallen and probably will ultimately reach the old financial supermarket world.

But everybody has been predicting it for 20 years now, going back to Sears and Dean Witter and Allstate Insurance.

It probably will migrate that way. It may take another 10 years. I don't think that will be a surprising development.

What will the online brokerage industry look like in 10 years?

QUICK: I would say that you will have fewer players out there. I think that brokerage component will become a major part of the business that is being done through individual banks. I strongly believe that we will see brokerage as the hub to which all the different other services will come.

CLIFFORD: I see globalization really taking off as well. I'd like our clients to be able to trade in any currency, in any country, any time of day, around the world. So investors in the U.S. will be able to buy a light bulb manufacturer in Hungary if they wanted to.

It really puts a stress on technology and communications and the Internet. Because a lot of the old systems that are out there are oriented toward T-3 and T-5, and everything has got to be real-time and 24 by 7.

WHITMORE: I would argue that there will be applications of Internet technology that we can't even imagine. Not that being able to smell through your computer has anything to do with finance, but these issues, this much broader, richer experience is inevitably coming with increasing processing power.

So are online firms going to be able to create personal, physical relationship situations over an online environment? Probably so.

CLIFFORD: I remember going to the '64-'65 World's Fair in Queens and AT&T had their picture-phone there. And people don't necessarily want to have people see them when they first get up in the morning. People still want to be in a business relationship, and they don't necessarily want people invading their house. I still think collaboration is coming, but with voice or text [like instant messenger], not always with video. People don't necessarily want to be seen. They want to be heard.

If you were going to find a partner, would you rather be owned by a bank or a large brokerage?

WHITMORE: In many ways I don't think it matters. I think that as Internet technology evolves, there is potentially less need for the customer to have everything into one organization, because everything is so electronic. All these assets can be brought together for viewing and analyzing without their physically being under any one umbrella.

QUICK: I think as the Internet moves forward, convenience becomes much more important to an individual. I think that Fleet brings the best of both worlds to its client base.

When our advertising at Fleet mentioned Quick & Reilly explicitly as the brokerage firm through which online trades are executed, there was a much higher rate of new account openings. Previously, the ads simply said that you could do brokerage with your Fleet Homelink account, and that didn't mean that much to the client. It was when they said, 'Do it with our subsidiary, Quick & Reilly,' that there was much more interest.

I believe consumers have a high level of trust in their banks, but want to invest through an established securities firm.

CLIFFORD: Even within the brokerage world, I think what people want varies by what country they're in, as well as where they are in their financial life and their well of financial assets.

More and more important, and more increasingly, both the U.S. and overseas, people have to take care of themselves. I mean in Europe, people used to go to banks. They used to get very high interest rates - 10-12% - just having the money sitting in a bank. Inflation was high. The government took care of your pension.

Now with the Euro, inflation is down. Interest rates are down, and the governments are saying, 'I can't afford your pension.' Investments are becoming very important over there. It's going to be a huge wave, almost bigger than here, that's coming.

So over there, they want to invest in a bank - it's their mindset. Here, people can invest with a brokerage firm and they can also maintain their cash assets as well. For example, in our FMA, we offer checking, debit cards, and bill payment, and we also offer a choice of sweeping their cash into FDIC-insured accounts or money market funds.

WHITMORE: What I find is sort of interesting is that earlier there was a belief put forth that online trading is a commodity, yet there seems to be evidence that investors want to go to firms that they know do that well. So it seems sort of like - the investment world is so much more complex, so much more specialized, so much more real-time, that there is a belief on the part of financial consumers that traditional brick-based financial services organizations such as banks can't get there. They can't run fast enough, they are not versatile enough.

But taking on demand-deposit capturing and liquidity products like money markets has proven a virtual lay-up for our business. We've attracted tons of money from the old-line financial services.

I think at the heart of this is that trade execution is not a commodity. Really high-quality execution, efficiently delivered, with knock-your-socks-off customer service, really will draw people in.

I have a feeling that the brokerage-centered organizations will gain prominence as we go forth. The models that the people use at the top end of our business, the big market share people, are the models that everybody is going to be moving towards from all sides.

What about customer loyalty? Is there any?

WHITMORE: I would say yes. Brokerage firms have a tendency to have a personality. For example, we have a product called Streamer which is a free real-time streaming quote applet. We have a group of people who are fans of Streamer. They talk about it on chat rooms and message boards, and act as an advocate for our company in telling their co-workers how cool Streamer is and they should have an account with Datek.

There is no question these people feel connected with the culture of our firm and the personality of our firm.

QUICK: What you're saying is that you have a hook, streaming quotes, which creates loyalty with a group of customers. In our case, the hook is an account that gives people the best of both worlds, the Internet and interpersonal contact. I don't think, in terms strictly of price, that there is a lot of loyalty.

I think there is a loyalty between the broker and the client. And so it is much tougher for clients to leave because they feel - it's almost like divorcing - you're divorcing your spouse. You're leaving somebody after all these years, and there's guilt associated with it. So that is the reason clients open another brokerage account but do not move all their assets out of that particular firm.

That is one of the reasons why you do have multiple accounts. Clients don't really give up that relationship with the broker locally, and yet there are transactions that are taking place where they don't need the involvement of that particular individual at the primary institution.

Therefore, they pick and choose when and where they direct their business.

CLIFFORD: As Tom points out, the relationships between the broker, the financial consultant, as we call them, and the individual is very important. The advice is not just should I buy this stock or that stock, but what should my allocation be. What should I do with my Rule 144 stock? What should I do with my IRA Rollover? How do I transfer my business to my kids? How do I take my business public?

There are a lot of other things, other than should I buy this or that, that a financial consultant advises. It's the whole financial balance sheet of the individual that we're trying to support.

We've seen the business model shift from full-service to discount, now to the Internet. Do you ever see it going the other way?

CLIFFORD: We'll swing back, but not all the way back to the point where the Internet isn't important. It will be the combination of people and technology.

WHITMORE: It's an interesting question, and I think it actually starts to speak to another question that we're all grappling with, and that's the issue of advice. We think it's true at Datek that advice is going to be sought, but we think it's going to be sought on a more objective basis.

Finance is very complicated, and the average person on the street doesn't understand all the intricacies of our business. It's not unlike your relationship with your auto mechanic or your doctor. If your doctor tells you that you need your gall bladder taken out, you have no basis to argue with him on that. You simply follow his advice. And it's not unlike financial advice. If the well-suited, smiling, educated rep tells you that you need this Ginnie Mae fund, you're very likely to just simply buy it without any understanding that it carries a 4.5% commission, as opposed to purchasing the straight Ginnie Mae carrying a 2% commission.

This issue is really, really core. I believe - and we believe at Datek - that this generation, which has been raised at a very self-directed environment, even though they're going to seek advice, they're not going to seek it from a commission-generating environment.

CLIFFORD: We see our fee-based services going up quite a bit. However, some clients prefer to pay commissions per transaction. They realize they're getting a lot of advice and value from the financial consultants, so they don't mind paying the commission. But we also offer our Asset One account and other fee-based services where there is a different fee based on their assets for the advice, and then they can trade as much as they want.

QUICK: At Quick & Reilly we lose clients to other firms that are offering a deeper discount, or in a lot of cases, we're losing them to a full commission firm like a Merrill or a Salomon Smith Barney where they want advice.

Where they've come into their 401(k) and come into their pension profit-sharing plans, they don't feel terribly comfortable making all the decisions to invest those monies. And yes, they'll keep a certain amount set aside that they'll trade. But for a lot of these people they'll have the bulk of their assets set aside to produce income to insure that they enjoy the lifestyle that they have become accustomed to.

As part of Fleet, we will be able to move these customers to the Private Clients Group, where they will have access to the experts who have the knowledge of how to manage sizable assets. This includes what to do with assets in terms of passing them on to children, or any other list of questions.

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