The Online Brokerage Wars: E*Trade Offers Compelling Risk/Reward 32 comments
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One of the most competitive spaces right now must be the online brokerage business. It is to be expected: it is an industry with relatively low barriers for entry and a huge potential market. As the stock market is democratized by the power of the Internet and its abundance of quality information, the need for full-service brokers is dwindling.
This is not new, and the process has been going on for years now. Yet, full-service brokers still have significant number of customers who the online brokers are constantly vying for. Likewise, new generations of would-be investors join the mass of potential customers each year as thousands of young professionals with an independent, entrepreneurial mindset enter the job market and need to decide how to invest their newly acquired disposable income.
Online brokers invest intensely in advertising and promotions trying to gain these available new customers, and of course, steal a few from the competition. This massive investment and ferocious competition keep their margins razor-thin. In this situation, is it wise to invest in an online broker? If so, which one, if any, is poised to win the online broker war?
The three front-runners in this race are Charles Schwab (SCHW), TD Ameritrade (AMTD) and E*Trade (ETFC). Their trading platforms, fees and quality service can be considered quite similar in principle. What will determine then which a potential customer will choose? Here is where building an emotional connection with target customers becomes crucial. In a market where the tangible products or services being offered are quite homogeneous between competitors, creating a sense of rapport and shared values becomes the angle that can make the difference for a consumer.
Each of the three key brokers is trying to achieve this affinity of values in different ways. TD Ameritrade is sticking to Sam Waterston as its spokesperson and trying to leverage the independent spirit of America as their guiding value. This approach, in my view, has limited appeal among young, truly independent investors. It positions investing as a fairly stern, mature and conventional endeavor. That does not resonate well with the right-brained nature of the current generation of customers (for a great book on this, I suggest Daniel Pink's A Whole New Mind: Why Right-Brainers Will Rule the Future).
Charles Schwab hit a home-run with the launch of its "Talk to Chuck" campaign. What a dramatic repositioning for the company! The pioneer of the industry had been losing ground to other online brokers after the retirement of its name-sake founder. The new management at that point lost its sense of direction and tried to take the company to play with the big boys… exactly the opposite of what had made the company successful in the first place! When Charles Schwab returned at the helm, he realized that the company had lost touch with its customers and had created a stodgy and outdated image for itself. "Talk to Chuck" was a vibrant and energetic way of re-humanize Charles Schwab.
From the emotional perspective, I think Schwab is in the best position in its history. "Talk to Chuck" is a warm, fun and irreverent campaign that makes the company approachable and dynamic. However, Schwab might be missing an opportunity: their recent commercials are still talking to sophisticated investors. Their strategy is still about switching consumers from the full-service brokers. In its commercials, Schwab's "customers" invariably explain how the service they got from their previous broker didn't match their own sophistication and knowledge. This communication may be irrelevant for investors that don't feel to be as experienced and, dare I say it, wealthy as the ones portrayed in the ads.
Finally, there is E*Trade. This company was firing on all its cylinders until it got badly hit by the sub-prime meltdown. Its competitors didn't wait to take advantage of E*Trade's woes, and in just a matter of weeks, they stole thousands of consumers and billions of dollars from the company. Even in the midst of the crisis, E*Trade did not lose sight of the importance of communicating with its customers and the reassuring power of advertising. Despite its hemorrhage of liquidity and its internal shakeout, the company upheld its plans to advertise in the Super Bowl. E*Trade's famous "Trading Baby" TV ad was enough to assuage the consumers' jitters and is credited with stopping the bleeding.
In terms of understanding consumer values and position itself as the right complement to their lifestyle, E*Trade does the best job of all three. Their approach is plain, simple and straight-forward. They focus on the simplicity, power and excitement of trading, and are able to let the consumer know that they understand the emotions they are going through in navigating the stock market world: from the father making his first online trade surrounded by his family, to the dude that trades while fragging his friend in "Gears Of War" (very insightful!). These are real people and E*Trade is there with them. Not above, not ahead, but at their side.
Online brokerages will continue to be in an intensely competitive industry in the foreseeable future, and the fierce fight to gain customers will continue demanding huge investments that will keep its profitability in check. Nevertheless, I think E*Trade presents a very compelling risk-reward proposition right now. The stock price is still depressed after the credit crunch scare. While I think their financial situation is still fragile, management is doing the right things to refocus the business and gain new customers. All reports indicate they keep opening new accounts at a vigorous pace. I am not surprised. I think E*Trade has a strong brand equity and they know how to leverage it among the segment of consumers that represent the highest potential for gains. I think the bottom for E*Trade is in the past, and for the patient investor, this could be a rewarding investment. Something to consider for your portfolio; who knows, soon you may even get to rent your own clown.
Disclosure: I own shares of ETFC.
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what's your projection on etfc in the near term to 2 years?
If by cashing out you incurred an extra 100k at 30% as opposed to the 15% you would have expected:
1) Less than one year ago you deposited over $2,750,000 into your Etrade account.
2) You managed a 20% return in under a year
3) at this point you are sitting on ~$650,000 of gains.
4) You withdraw early and owe ~$195,000 in taxes, as opposed to the ~$95,000 you expected to pay had you held for a year.
I'm not buying it
On another note--I sense somthing is in the works, like another company buying etrade. Why wouldnt you? Wells Fargo for instance...8$ share.
Oh, and I own some etfc and am wondering if I should buy more. It's a small position but the price can't get much worse given the information we're hearing about their operations....
Totally agree; ETFC "gets" advertising.
Seeing their banner ads plastered in every corner of the net is one of the main reasons I bought in - most companies are wimpering in the corner when they're down. But these guys are out there sellin' it. And it's paying off.
People let me cue you in on something about Schwab. Early in 2008, I contacted Schwab and offered to speak at one of their active trader meetings (for free) at the upcoming event (which was 3 days before Bear Stearns was bailed out).
I wanted to help people because I was one of only a few of the people in the world who predicted all that we see today and wrote about it in a book a few years back.
I knew that the media was not really telling people what was going on in the banking collapse and felt that the most important thing would be to provide some guidance and risk considerations to these Schwab clients (since I knew they were 100% lost).
When I went to this event to meet up with key contacts, I was shocked to see that the event consisted of mostly elderly people and the seminars were beginner level - they were teaching the elderly the basics of technical analysis and other things. I was shocked! I wondered, WTF is Schwab doing suckering in desperate elderly people into the most dangerous period of the market now?
Surely they would be having an expert speaker to discuss the current banking crisis, wouldn't they? Not at all. The whole day it was ignored as if it did not exist. They had some guy from one of the lame duck shows on CNBC speak during lunch. And although many in the audience had specific investment questions regarding oil, banks, Bear Stearns, real estate, gold and so on, this fellow was unable to give any decent advice - reason? Because he was clueless. He is on CNBC - what do you expect? Those who appear regularly on TV have no clue what is going on. They are marketers and entertainers.
After following up with Schwab officials the following week, I was sent to some kid who was in charge of these events. He did not bother to even call me...he emailed me with the response..."sorry but we have speakers booked through 2009."
Of course what I was offering (for free once again) was to help guide investors through the current banking and real estate mess NOW, not after 2009. All of this proved to me that Schwab is a complete joke, and no better than the other discount brokers, which are much much worse than the REAL Wall Street brokers.
My advice? Stay far away from Schwab. They are very dangerous because they try to position themselves as advice providers when they are complete idiots. All you have to do to confirm this is call one of their reps and ask for market guidance. They will read off the list of BS they have been told to push "stay invested, think long term, diversify." Wow real valuable. But do not dare ask about options unless you are ready to assume the risk of getting wrong information as I have.
I'd stick with e-trade. At least they don't pretend to offer expert advice and fail to deliver. Always stay away from deceptive people/companies and Schwab is as deceptive as they come in my opinion.
As far as investing goes, why risk investing in any financials when there are so many better opportunities out there. if you aren't in oil, gold, other commodities, China and Latin America, you're just lost.
Listen to me kids. You Cannot do it yourself. You will lose. Trust me, unless you are following someone who is really sharp. And you certainly aren't going to find that person on TV or the financial publications. They are all meant for the sheep. Your best bet is to stick with commodities and emerging markets for the next few years.
my real question is what happened to the follow on effort designed to capitalise on the apparent success of that ad campaign? etrade is almost non-existant when it comes to TV advertising. Chuck and amtd both have substantial TV ad campaigns and, guess what, both have millions more customers than etrade.
Everything for etrade hinges on its return to profitability. many factors that will contribute to this are largely out of their hands. they can't put people back to work or pay their bills for them. but what they can do is aggressively grow their customer base, which will grow revenue and offset many of the losses they have provisioned for. to do this they need to be on TV.