THE NEW CAUTIOUS OPTIMISTS

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Faster than you can say “risk averse,� investors are getting back into the thrill of trying to strike pay dirt online. Brokerage firms, in a $1 billion marketing blitz, want to know all there is to know about those who dare to invest, bubble or no bubble.

MIKE LAURIA, 45, A COMMERICIAL AIRLINE PILOT, says he's managing about $100,000 in an online brokerage account mostly for the thrill of it.

“I'm not a stock market junkie; for me this is a fun little hobby that's also profitable,� he says.

Lauria made his first online stock trade in 1998 on E-Trade, and after testing out several of the other brokerage firms, remains an E-Trade customer, averaging 200 trades per quarter, a little over two a day. His investing pace slowed during the downturn of 2000, but not much, he says. Last year alone he claims to have made $50,000 on his online investments. Lauria's minimum online investment is about $5,000; his maximum is about eight times that amount.“I don't like to be exposed much beyond $40,000,� he says.

Thanks to his high volume of trading, Lauria qualifies as a “Power E-Trader,� allowing him access to a hotline for speedy technical assistance whenever he has questions about E-Trade's services.

“I tried out Ameritrade last year when they had a promotion offering a lot of free trades, but I was unhappy with their setup. I didn't get rapid confirmations of my actions, and when I wanted to short stocks, it didn't update me as quickly as E-Trade did on the stock's availability,� says Lauria. He prefers E-Trade's Web screens, which show rising stocks in green and falling stocks in red, all on one page with a flashing button that readily alerts him to availability if he wants to short a stock. He does his own research, and follows 40 stocks regularly, including 20 on a closely watched list.

“I can tell you at any moment what those 20 stocks are doing, and I check them constantly,� he says. He tracks the 30-, 60- and 90-day performance charts of stocks he's interested in, and is a close follower of CBS Marketwatch's online recommendations for stocks to watch. He tunes in daily to cable TV's CNBC.

“CNBC doesn't have any real competition. It's the only financial news any of us watch, including my friends who are also investors,� he says.

Quick execution of trades is important, but whether it's guaranteed within five seconds, or within nine seconds as E-Trade promises with its “Power of Nine� campaign, is irrelevant to Lauria. Although he is happy with E-Trade, Lauria is now considering switching to Fidelity Investments, which recently implemented an $8 flat fee for trades or limit orders for anyone who makes at least 120 trades per year (versus E-Trade's current $9.99 fee). He checks in with E-Trade every day, and on days he's not flying he's likely to make at least a few trades.

As confidence rises with improving stock market conditions, the major online brokerage firms are turning bullish as they pursue a far more sophisticated consumer than the soccer-mom day trader making a killing in her kitchen during the late 1990s. The top five online brokerage firms have boosted advertising significantly this year to capture customers as individual investors emerge from a three-year hiatus and return to the stock market.

Targeting a warier and more tech-savvy customer than the newcomers who helped set the heady tone for the online brokerage industry in the 1990s, the new goal is to lure the most active and experienced traders who generate the most profits through the fees they pay for each trade. “The true active trader, who generates upwards of 120 trades a year, represents about 20 percent of the market but accounts for about 80 percent of the profits,� says Dennis Ceru, director of retail brokerage and investment for the Needham, Mass.-based research firm TowerGroup

E-Trade Financial Corp. is expected to increase its overall advertising spending to $90 million this year, up from around $40 million last year; Charles Schwab & Co. is expected to spend between $80 million and $100 million this year, an increase of as much as 50 percent, while Ameritrade Holding Corp. will spend at least $60 million, and TD Waterhouse Investor Services, Inc., is expected to spend more than $50 million in advertising.

Although brokerage firms are experiencing solid profits from the heavier trading volume of the past several months, many analysts predict the stock market upswing may not last beyond a year, and the online brokerage industry will likely face consolidation in order to maintain growth and profits through greater efficiencies and economies of scale.

Within the last few months E-Trade toyed with the idea of swallowing rival TD Waterhouse, which could upset the lead Ameritrade had gained when it purchased competitor Datek in 2002.

“Eventually this bubble will burst like the last one, but meanwhile the importance of trading volume to profits cannot be overstated for online brokerage firms,� says Adam Josephson, an analyst in the securities and investment group of the Boston-based research and consulting firm Celent Communications. “Online brokerage firms are therefore devoting large amounts of their resources to targeting those who trade most frequently.�

What's at stake is an estimated 22 million U.S. households representing about $6 trillion in assets, say analysts.

Schwab estimates that about $600 billion in investor funds is in flux at any given moment, and within that group, most of the online brokerage firms are chasing the most lucrative, “active� investors who each make at least 10 trades per month. (So-called day traders, or amateur arbitrageurs, make as many as thousands of trades per day; higher trading volume commands lower fees.)

Latest up in the battle for market share is a price war over trading fees, advertising that touts five-second transaction executions, streaming news, real-time data and the ability to make trades from cell phones and PDAs.

Investors have responded by pouring money into stock funds through the first part of this year at rates not seen since February 2000, according to fund-tracking firms.

But it's a much different scene today than in 1999, when Ameritrade's copy machine guy, Stuart, lightheartedly advised “Mr. P� in a TV commercial to dive into online investing with the battle cry: “Let's light this candle!�

Investors are moving more carefully this time, remembering the sting of stock market declines that began in 2000 and continued through last year.

Despite a gradual rise in stock market values beginning in early 2003, the overriding investor mood now is “cautious optimism,� according to a survey of 515 people conducted by Schwab in December 2003, with a solid majority (66 percent) describing themselves as cautious rather than confident (34 percent).

“When the stock market began to show gains last year, investors said, ‘I've been here before, but can I trust this?’ They're feeling very cautious, but they still want to get back into the market when it's going up,� says Rob Steidle, director of competitive intelligence at Ameritrade Holding Corp.

When it comes to tweaking their advertising to reflect up-to-the-minute changes in markets and national confidence, the online brokerage firms are among the most obsessive.

Unlike consumer packaged goods marketers, financial service advertisers are quick to turn around newspaper and direct mail ads to reflect new rates and fees, and online brokerage firms also tend to be quick to respond to new developments with TV spots.

Most online brokerages constantly test their own and their competitors' advertising, along with the ease of use of their online products, in proprietary “usability labs.�

But as the online brokerage sector has matured along with computer technology and widespread high-speed Internet access among investors, product differentiation has begun to blur, say industry analysts.

As a result, the subtleties of brand image will play a bigger role in determining the success of the major online brokerage firms during the next 12 months, says TowerGroup's Ceru.

“Each of the brokerage firms now has the same very sophisticated computer systems, and very similar products. The competitive edge has become price, service, brand, reputation and trust, not pure technology or speed like it was a few years ago,� says Ceru.

Rational reasons to choose one brokerage firm over another will prevail in advertising, unlike some of the high-profile antics online brokers used in the early 1990s to build awareness of investing's electronic frontier.

“Advertising was very light and bubbly when people were just discovering online brokerage services, with jokes and animals and Super Bowl spots and guys like Stuart,� says Ameritrade's Steidle. “Then the crash happened and advertising became very dark and serious, about protecting your assets and trying to maintain your status. Now, consumers want to test the waters, but they have a lot more choices out there and brokerage advertising is becoming entertaining again, with a sense of exciting possibilities,� he says.

Media buyers expect online brokerage to drive a significant amount of advance media sales for this fall, during television's “upfront� media buying season that occurs this spring, although none would specify their plans.

“The national upfront TV market got extremely expensive last year, so we're taking a close look at things this year before making commitments because we want to get the best value,� says Janet Hawkins, executive vice president of marketing for TD Waterhouse Investor Services in New York.

One of the most significant developments in the online brokerage sector this year has been Schwab's decision to aim its products more squarely at upscale customers with $100,000 to $1 million to invest, competing directly with full-service brokerage firms and marking a clear break with its discount-broker roots.

“I think the press has hung on to the idea of Schwab as a discount broker for a lot longer than we have,� says Beth Stelluto, Schwab's senior vice president of enterprise marketing communications. “We've always had a wide range of investors, and now we're definitely going after upscale investors, and everyone from the emerging investor to the super-affluent one,� she says.

In a campaign which began in February, the company introduced Schwab Personal Choice, an expanded menu of investing services which includes more ways to get advice from brokers in person, over the phone or online, as well as bare-bones online plans that are strictly self-service.

Stelluto says Schwab's research showed latent demand for investment advice by people who also like to manage their own stocks. The result is a kind of mass customization of services, versus the more starkly do-it-yourself, no-advice online investing services offered by the other online brokerage firms.

Schwab uses a tongue-in-cheek approach to introduce Personal Choice in three 30-second national TV spots to show how a few friends can have totally opposite needs for investing advice. One spot centering on three women at lunch concludes with the line: “Who knew finding the right broker would be harder than finding the right man?�

Print ads in national newspapers and magazines, plus direct mail offerings, support the launch. Austin,Texas-based GDS&M is Schwab's agency and media buying is handled in-house.

But the premise that people may suddenly decide to seek out investment advice due to portfolio or market changes is far-fetched, says Jaime Punishill, a principal analyst with Forrester Research in Cambridge, Mass.

“Our research shows that people have an inborn investment style, which makes them inclined to do their own research, or seek out help, and it doesn't matter what's going on with the market or with new technology� he says. “By now, everyone who's interested knows about online investing, and the idea that people are going to rush to get investing advice now, because more of it is available, is just not true,� Punishill says.

Each week since 1999, Ameritrade has been conducting telephone interviews with 75 different randomly selected U.S. households about their attitudes toward investing online. The survey provides an ongoing tracking of consumers' mindsets, which informs Ameritrade's advertising, says Steidle.

“We ask questions about consumers' concerns about the economy, and their jobs, and what is a good investment, and it lets us know which online investment brand has high unaided awareness, so we know where we should dial our advertising up or down, and on what issues,� he says.

In addition, Ameritrade conducts in-depth interviews with its online customers each quarter, to refine its products and tools. When the company purchased rival online brokerage firm Datek in 2002, customer panelists told Ameritrade which best features of each service to integrate into a unified offering, says Steidle.

Recently, Ameritrade asked its customers for their opinions about investment advice, which the firm, like most of its rivals, does not offer.

“A small percentage said advice is something they needed. Surprisingly, 25 percent said they already have a financial adviser, which tells us those people are doing a combination of self-directed investing plus getting input from a broker, and they are satisfied with our offering,� says Steidle.

Ameritrade's current advertising campaign, themed “Good idea, bad idea,� promotes its five-second trade execution guarantee and its trademarked “Streamer� real-time market information. The TV spots, which broke last October, show how speed can be good (as in executing a quick trade order) and bad (when food is undercooked at a restaurant). Although longtime agency Ogilvy & Mather in New York, created the four 30-second spots that are airing on national TV, Ameritrade nevertheless tested the spots internally and recommended key adjustments in the creative, says Steidle.

On March 2, Ameritrade purchased its first-ever media “roadblock� across all broadcast financial media, to grab the attention of all investors by sponsoring the closing hour of the market on all financial Internet and cable TV channels. A humorous TV spot showed all the diverse things that could happen in one hour. It was an example of the type of creative media placement Ameritrade deploys via Ogilvy's sister media-buying agency, Mindshare.

Early this year Ameritrade opened its first dedicated offices for customers, including two in Portland, Ore., and one in Scottsdale, Ariz., as part of a test.

“We want to see how it benefits us to have offices where customers can get information about using Ameritech, or to pick up a check or make a payment. It is not a bank,� says an Ameritrade spokeswoman.

Indeed, having a network of 150 branches nationwide and a bank (Canada's Toronto Dominion Bank) is one of the keys in recruiting and maintaining customers for TD Waterhouse, says Hawkins.

Although TD Waterhouse offers no investment advice, its customers have access to a nationwide network of ATMs that can be linked to online brokerage accounts, which it promotes along with its value proposition of rich research tools, reliability and fast turnaround on orders.

TD Waterhouse's current TV campaign, which began last November, features Sam Waterston of NBC's Law & Order, who says: “Why pay all that money to Merrill, Schwab or some other higher-priced broker, when you can switch to TD Waterhouse?�

“We tested a number of actors for the spots, but Sam Waterston tested very high on credibility, which is what our research showed investors want in the current economy,� says Stephen Crane, executive creative director for agency Cosette Post, New York, which created the campaign. Media Edge: cia, New York, handles media buying across national and cable TV, plus financial print vehicles.

E-Trade, whose positioning is similar to Ameritrade, broke its first new advertising in February through new agency Martin/Williams of Minneapolis, using a breathless sense of urgency in two of a total of four 30-second spots, spiked with humor.

One spot, showing a man chasing a woman across town with a bag of money, marks the first time an online brokerage has exploited the opportunity to provide rebates to mutual fund investors through the “12b-1� program. The amount of money returned is incremental, paid every six months, directly into the mutual fund investor's account, but E-Trade is the first to promote it; analysts say other brokerage firms may follow suit later this year.

A second TV commercial touts E-Trade's Mortgage on the Move product (E-Trade Bank is part of the company's diversified offerings, after making 21 acquisitions since 1996). The spot shows the consternation of homeowners who will have to pack up and move when a rowdy family arrives next door.

“The ads set out to get people to question their current financial behaviors and realize there is a better way,� says Tom Moudry, Martin/Williams's executive creative director. Media buying is handled in-house.

E-Trade currently has eight walk-in branches in the U.S., with plans to expand to 20 by year-end, says a spokeswoman.

Fidelity Investments, long the leader in individual mutual fund investing, last fall launched its first significant TV ads specifically touting online brokerage services, says Laura Groak, senior vice president-active trader services at Fidelity.

“We've been in the brokerage business for a long time, but we've never promoted it before, and our goal is to pull active traders from other online brokerage competitors,� says Groak, adding that more brokerage-specific advertising is in the pipeline for later this year.

The TV campaign, created by Arnold Worldwide in Boston, is themed: “Power. Price. Service. No compromises.� (Fidelity has been shopping for a new advertising agency since last fall.)

One 30-second TV spot shows a man wrapping up a brisk day of trading in his cubicle, surrounded by computer screens. The camera cuts to reveal he's actually in a home office, and his little girl runs to greet him.

“With this advertising, we wanted to speak directly to our customers, who tend to be very independent and do their own research, to show them our improved services and to prove that our offer is unbeatable,� says Groak.

Fidelity's brokerage services are being promoted on TV via national and cable financial TV programming; in print ads, created in-house, running in financial publications, and through direct mail. Media buying is handled in-house.

The biggest question surrounding the possibility of a sustained stock market upswing is whether consumer investment behavior really changed since 1999.

“I'm not all that confident that any lessons were learned [by the downturn of 2000],� says John Nofsinger, a finance professor at Washington State University in Pullman, Wash., and author of the book, The Psychology of Investing (Prentice Hall, 2002), which is used in several national certification programs for financial advisers.

“Although a lot of people lost money in the last downturn, they see the market going up now and they think it's a good time to get back into the stock market, which is actually irrational. If the market has already gone up, it means you missed the opportunity. Jumping in and out of the stock market is a loser's game, and the old fact remains that a buy-and-hold strategy is the wisest,� says Nofsinger.

High Sights

After the bubble burst at the end of the millennium, many lower-income and casual traders left their day trading ways behind. Now, online brokers are targeting the high-income investors who remained in the market and have the capital to make more trades.

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