Online Brokers Will Be Acquired By Banks and Brokerages Says optionsXpress Founder

Excerpts from Seeking Alpha's interactive Q&A with optionsXpress founder Ned Bennett:

Question:

There's been speculation recently that the recent results from the online brokerages might lead to consolidation. See for example this view from Barron's. What's your view of the potential for consolidation in the online brokerage sector? Who would it make most sense for?

Ned Bennett, optionsXpress:

I think consolidation is inevitable. It has been in all industries. The Wall Street analysts see E*TRADE and Ameritrade as candidates. I think you may see banks and other traditional brokers get in the mix, too.

Question:

You mentioned earlier that you thought the banks and full service brokerages would make a move to acquire the online brokerages. My questions are as follows:

-- None of the full service brokerages have made a move so far. In fact, they even sold their online divisions. For example, Morgan Stanley sold Discover Direct. What makes things different for them now?

-- If you had to guess, which banks do you think will make a move into the online brokerage sector in the next two years?

Ned Bennett, optionsXpress:

In my opinion, the major traditional firms are having an internal struggle, producers versus “self directed”. I think they are trying to transition to the fee based model. Once that is done they can offer the transaction model online as self directed. In a nut shell, they are afraid that their producers will get upset and leave if they “compete” for self directed.

I think they will discover that everyone with a computer has an online account. And as the online firms began to compete for “assets” and be successful it will wake up the “sleeping giants”. They will decide to participate. Charles Schwab is doing a good job of gathering assets. Just look at the offerings of the big traditional firms, they were second rate at best. They will figure it out. We are not that smart.

Banks and brokers have always been like oil and water. As groups, we look at everything differently. And so each foray has been painful. But the banks are learning…a branch on every desk, and brokerage is a part of what can be offered. They will learn that price, even zero, means nothing when you can’t comfortably make the trade.

But as online banking grows they will learn. Which ones… I am not in that line of work, but I think it won’t take too much to pick the aggressive ones. I think the successful one will buy not build so that they get the management to lead.

Excerpted from the full Q&A with optionsXpress. See also the full list of Seeking Alpha's interviews.