The new cautious optimists

American Demographics, April 1, 2004 by Kate Fitzgerald

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.