Dan Borgmeier has had it with online trading. A 31-year-old executive at a Minneapolis Internet startup, Borgmeier set up an ETrade Group account in late 1997 and got hooked on trading after raking in $US30,000 from hot tech stocks while paying only $US2,000 in commissions.
Borgmeier never planned to become an active trader, but the easy gains led to high hopes and high risk. The volatile stock market not only wiped out his gains, but also led to equally large losses before Borgmeier cut bait. "The more I traded, the more I lost," he says. So Borgmeier opened an account with Edward Jones, an old-fashioned retail brokerage that handled his parents' money.
Based in St. Louis, Edward Jones is hardly a marvel of Internet technology; it has a Web site, but it's a low-key affair. There's no way to trade on the site; instead, the homepage invites the visitor to locate a broker in one of the firm's 6,417 branches. The $US100-plus commission Edward Jones charges per transaction is several times what you would pay at the major online brokers.
But that's no obstacle to people like Borgmeier, who value the conservative, hand-holding approach of Edward Jones' network of 6,765 brokers, most of whom operate one-person offices.
In some respects, the Internet is the best thing that never happened to Edward Jones. The company estimates about 2,000 of its customers closed their accounts to move online - although many more have dual accounts - but managing partner John Bachmann says a third of them have come back, burned by the vagaries of Net stocks. "The American public doesn't want to gamble in the market," notes Bachmann. "Have you ever seen a man in your office crying because he made a mistake?"
As upstart online brokerages like E-Trade, saddled with their own sagging stock prices, struggle to add investment advisory services, Edward Jones is thriving even as it shuns the Net. Among major retail brokers, only The Charles Schwab Corp. (SCH) is growing at a faster rate. Edward Jones plans to add features like portfolio tracking to its site, but not online trading. Instead, the company will expand its branch outlets - most of which are on sleepy corners in small cities and towns. Edward Jones aims to have 10,000 branches in the United States, Canada and the United Kingdom by 2003.
Meanwhile Net brokers, along with old Wall Street firms that leapt into online trading, are now enlarging their armies of brokers, contrary to early predictions that the Internet would lead to the profession's demise. The point was driven home last month when Swiss banking giant UBS AG (UBBSY) Securities bought PaineWebber for a 47 percent premium over the stock's closing price before the deal was announced. That offer included $US875 million worth of bonuses to keep PaineWebber brokers from jumping ship.
Steering clear of the Internet has served Edward Jones well: Its revenue has grown 29 percent in the last year without a single online trade. The challenge for the brokerage will be to sustain its growing network as many of its clients - most of them over 50 - begin to work down their nest eggs in retirement and are replaced by a generation of investors more accustomed to online trading.
But the firm believes that investors who can trade profitably without the aid of a seasoned broker will always be in the minority.
"Do-it-yourself investing is a bull-market business," says Bachmann, who believes only one in every six individuals is a true do-it-yourself investor.
"At the first real downturn, the do-it-yourselfers are going to be in total disarray. You won't know how big that market is until you go through a market cycle." Most online brokerages, he adds, "aren't going to make it through the cycle."
Edward Jones is betting that the bread-and-butter of retail investing hinges on people like Leo and Ann Rohlfing, rather than on frenetic daytraders. The couple runs a dairy farm in Washington, a town of 12,000 about 45 miles southwest of St. Louis. The town is still home to descendants of German immigrants who in the last century made Washington well-known for its brewery and its zither manufacturing. It's people like these that the online brokers would like to believe are their domain; their television ads show truck drivers and grandparents trading online. But the Rohlfings use the Internet for news about stocks, but have no interest in trading online. "I just wouldn't trust myself," says Ann Rohlfing. At a recent visit to the Edward Jones office in Washington, the two sat down with David Reifschneider, who offered advice with enough conviction that the Rohlfings accepted his suggestions.
With 11 years at Edward Jones, 36-year-old Reifschneider is one of the company's more senior brokers in the region. He's known and respected by his neighbors in Washington. His days of door-to-door sales have long since ended, and he struggles to manage the accounts and referrals from his clients, which number around 1,000.
Reifschneider's workday looks much as it did before the Net. He sits with a phone headset on and calls clients who have had CDs mature or who need to redistribute some 401(k) money. The typical Edward Jones customer holds onto a mutual fund for 20 years, four times the industry's five-year average.
Two or three times a day, Reifschneider meets customers at his office, and he still makes an occasional house call. Once in a while, a client will call wanting to make a trade. When the Nasdaq fell 575 points in a matter of hours on April 4, it was pretty much like any other day for Reifschneider.
Two computers sit on his desk: a laptop displaying his calendar and phone numbers and a desktop PC that logs him into Edward Jones' internal system.
Neither one has e-mail or Web access. There's no television tuned to CNBC in the background. The chatter with clients is hardly high-pressure. Reifschneider starts calls with small talk about church events or his 7-week-old son's sleeping habits. Notes on his laptop serve as a guidebook to conversations as he inquires about children and grandchildren by name, or whether the money from a recent boat sale should go into another mutual fund.
Asked about the competition, Reifschneider talks about the local offices of A.G. Edwards (AGE) and Merrill (MER) Lynch. Losing customers to online trading firms isn't a concern. "I think it's perception vs. reality," he says. "The perception is that everyone's trading online, but out here in the Midwestern United States, I don't see broad use of the Internet."
Reifschneider guesses some of his clients might trade with online brokers, but he's never cared enough to ask. Trust is what keeps his clients, most of whom are retirees in their 60s, from abandoning him. Like Dan Borgmeier's parents, many of these customers are passing that sense of trust on to their children, who are beginning to manage family finances of their own.
Edward Jones built its business on its door-to-door sales in rural America, which is still the most significant piece of its marketing strategy. But the company has five offices in E-Trade's home turf in Silicon Valley - scattered between Santa Clara and Los Altos, among the mansions of Internet millionaires.
Bachmann says it is one of his firm's most successful regions.
While small investors have been offered unprecedented power from the Net, most of them still demand personal financial advice. The Internet, it turns out, isn't displacing the cozy approach of Edward Jones, but rather supplementing it with news, stock tools and - for the daring - trading.
It's a different fate than many had expected in the era of Internet stock trading. In early 1999, the online upstarts were ready to take over.
Ameritrade's stock climbed 708 percent during the first four months of the year, while E-Trade's more than tripled. Charles Schwab's market value surpassed that of Merrill Lynch. E-Trade gloated with ads in which retail brokers endured crowded subways to work, where they made unwelcome cold calls.
Intimidated, Wall Street brokers scrambled to adapt. Even mighty Merrill Lynch, which for years had staunchly resisted the gold-rush stampede to the Internet, capitulated last year and announced an online retail strategy complete with deep-discount trading and fee-based accounts. Giants like Morgan Stanley Dean Witter and Salomon Smith Barney followed suit with their own Net strategies.
They would play the online-trading game, whatever the cost. The trouble was that Wall Street firms moved too late, says Daniel Leemon, chief strategy officer for Charles Schwab. By the time firms had planned and built an online strategy, they had lost customers keen to trade online. Bachmann takes a different view: Merrill Lynch and the others should never have made the move online: "I thought it was a joke," he says. Merrill and the other banks can't compete with the $US8-per-trade commissions of Ameritrade, he adds, and they end up competing with their own brokers. "I think it's the most damaging thing they've done." The brutal market correction last April shook some speculators out of the market and slowed the volume of online trading, causing the stocks of Net brokers to slump. E-Trade and Ameritrade have lost more than half their value since last spring.
Most brokerages are retreating to the middle ground, offering online trades with the option of offline support. "When we started out, it was the brokers' inefficiencies we focused on," says E-Trade spokesman Patrick DiChiro. "As we expand, we want E-Trade customers to be able to access everything they want from a variety of platforms. They may even want to set up relationships with advisers."
Now even online brokerages are opening offices. E-Trade CEO Christos Cotsakos talks of hiring brokers to make house calls. Charles Schwab bought 147-year-old asset-management firm U.S. Trust (UTC) . And even though Schwab performs 81 percent of its trades online, it has expanded its maze of branches by 33 percent since it began online trading in 1998. "Customers are attracted to the mix of online and offline channels," says Schwab's Leemon.
In fact, demand for registered investment representatives has never been greater. Fierce hiring competition has led brokers to offer hefty compensation packages and signing bonuses - even perks like company cars. "Recruiting is absolutely wild right now, and retail brokers are still a very prized target," says George McGough, a recruiter with Wall Street search firm Hadley Lockwood.
Merrill Lynch, which has attracted only 24,000 customers since launching its $29.95-per-trade service online in December, is learning that customers come to the site for advice, not no-frills online trades. PaineWebber customers, who tend to have more assets than Merrill's, use the Net for research, information gathering and portfolio management, but haven't had much interest in placing trades online.
"The typical core affluent investor views entering a trade as a clerical function," says Marten Hoekstra, director of marketing for PaineWebber. "Online trading was really launched as a convenience for our clients. In the long run, I think it's an important convenience." For now, the brokerages that were quickest to engineer a mix of Internet and personal advice are the ones favored by investors. Merrill's stock currently trades close to its record high of 135, and Charles Schwab's stock is up 34 percent in the last year, compared with a 34 percent slump for the eBroker stock index tracked by Robertson Stephens.
As for the companies relying mostly on online brokering, some refuse to throw in the towel. "People more and more want to take control of their own lives," says Ed Nicoll, CEO of Datek Online, which has no physical branches or personal financial advice. "It's not clear to me how important those branches will be as people become more Net literate."
Internet companies also have fewer costs to cut should a prolonged bear market drive down revenues. It's easy to cut back on the marketing budget, but shutting down branches would be much more difficult, adds Nicoll.
Bachmann is perhaps the only brokerage executive who has stayed the offline course. He understands the Net's value to investors, but still insists that online trading isn't what's going to make his firm succeed. He sees his brokers competing with Schwab's investment advisers, but the Net isn't a playing field he wants to enter with the largest online broker.
Instead, Bachmann wants Edward Jones to succeed by being different. As competitors from both ends of the trading spectrum gravitate toward the middle ground, where the lines between personal financial advice and online trading blur, everyone will start to look alike, he says. By steering clear of the herd, Edward Jones plans to single-handedly own the market for individual investors who won't ever be interested in online trading.
Can Edward Jones hang on to its success as investors grow more familiar with the Internet as a way to invest? Bachmann is sure it will. Investors who grew up with the Net will experience a bear market, and when they do they'll run to the closest retail branch. The online brokerages, he says, "are mostly dead."
It seems most likely that, as professionals in their 20s and 30s accumulate more wealth, they will demand some combination of online services and personal financial advice. Bachmann agrees that investors will want a piece of their financial picture online. Edward Jones is adding online services at the pace of a tortoise, strategizing with painstaking care over each new feature. So far, customers can access only their account balances online. Eventually, they'll be able to manage all financial accounts on Edward Jones' Web site.
Bachmann hopes that will be enough to retain and attract Net-savvy investors as they grow in number over the decades. He maintains he won't wake up in the middle of the night worried that the online train is passing him by and he's chosen not to board it.
"No, I worry about how many sheep there are out there," Bachmann laughs. "But I'm comfortable with our strategy. There's a difference between being part of a market and being the total market. We're the leader in what we do."