Economy Watch: Online brokers shift gears to retention, not trading

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Look at how times have changed: Last year, E-Trade's Super Bowl ads featured a cheeky "ER" parody about a patient afflicted with "money coming out the wazoo." This year's standout from E-Trade was a monkey spoofing the dot-com carnage of 2000 and urging viewers to "Invest Wisely."

"You don't get a more ironic situation than the original dot-com making fun of the dot-coms," said Jaime Punishill, analyst at Forrester Research.

Ironic or not, online financial services providers have switched gears as the economy runs out of steam. Industry watchers note they have been forced to make budget cuts as the core financial service consumers sit out the latest wave of uncertainty. New clients are trading less often and have smaller amounts to invest, therefore they don't make up the shortfall from the core clients.

Ameritrade announced April 12 it would cut this year's $200 million advertising budget by as much as $60 million after first-quarter trade volume dropped sharply. The company announced about 300 staff cuts due to the slow economy.

Asset aggregation is now more important, since there has been an "absolute, unequivocal slowdown in trading," said Jupiter Research senior analyst Robert Sterling. "They have to milk the base they've got."

retention and cross-selling

Companies will have to concentrate on client retention and cross-selling those clients for as many assets as they can spare, note observers. For example, Charles Schwab & Co., the leading online brokerage firm, has switched its advertising message from strictly branding to focus more on advisory services and mutual fund programs such as its Portfolio Consultation and Mutual Fund OneSource products.

"With the bull market, people were excited about getting into the [stock] market. ... [Marketing] was who could get more face time with customers. Now it's customer retention," said Ludmila Palasin, VP-marketing at the Sloan Group. The New York-based agency has worked with financial services companies, including Citigroup and TIAA-CREF.

Jupiter, however, still projects a healthy growth in online brokerage assets-from $1.5 trillion in 2000 to $5.4 trillion in 2005-but the new clients will be more infrequent traders. Jupiter's analysis projects households trading 10 or fewer times per year will grow from 53% of online brokerage households currently to 80% by 2005.

That is bad news for brokerages, which charge a transaction fee per trade, but it explains why most have expanded their services to include services like banking and retirement plans that don't depend on fees per transaction. That's why E-Trade bought online bank Telebank and rebranded it as E-Trade Bank last year, Mr. Sterling said. Nearly all major online brokers now offer banking, mortgage and insurance functions.

The best segments in the next five years will be what For-rester's Mr. Punishill calls "Portfolio cruise control" and "Retire-ment by the Book" households, less active and more conservative. Meanwhile, the prized "Aggressive affluent" segment will drop from 34% of households investing online in 1999 to 15% in 2005, according to Forrester.

The online providers will have to fight harder for each dollar and get each dollar possible from their customers, industry watchers said.

"This is sweat-of the-brow kind of stuff," said Ms. Palasin.

Mr. Sterling noted Scottrade, a small discount brokerage with online and offline functions, uses online banner ads to recruit customers, but lets its 130 locations nationwide do the branding work.

So the latest wrinkle in marketing online services is good old brick and mortar. Like the online retailers before them, the online brokerages will have to reinvent themselves as a combination of clicks and mortar, noted Mr. Punishill. He noted that E-Trade, Datek and WebStreet all have plans to expand their physical presence nationwide this year.

Shifting focus

E-Trade CEO Christos Cotsakos told an analyst meeting in April that its total marketing spending in 2001 could be half the $400 million the company had initially planned. Until the stock market regains its vigor, which is expected sometime in the fall, E-Trade will shift focus from "hyper-growth" to managing its customer base and its revenue streams. The marketing budget for 2000 was $415 million.

"The land grab ... must be put on hold," he said. E-Trade will refocus marketing spending during the next two quarters, away from overall branding and expensive TV ads and toward cross-selling activities and expanding its physical presence, Mr. Cotsakos said.

On April 3, the company opened the first E-Trade Center, a glitzy four-story shop on New York's Madison Avenue where clients can bank, trade and research information. E-Trade's physical presence in a high-traffic zone gives the company a feeling of stability and sustainability in this unstable economy, Mr. Cotsakos said.

E-Trade began expanding into the "real world" in 2000, with a pilot location, branded as E-Trade Zone, inside a Target Super Store in suburban Atlanta and through the acquisition of Card Capture Services, an operator of ATM machines. This year, E-Trade plans to expand those concepts with 20 additional E-Trade Zones and 1,000 E-Trade Bank ATMs in other Target stores nationwide.

The mainstream customer is brand-conscious and loyal, but doesn't deal with finances in only one channel, said Mr. Punishill.

"It's not an either/or-it's both [channels]. E-Trade didn't realize that before. They do now," said Mr. Punishill. "When they got it, they turned the ship around fast."

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