WEB TOW: ONLINE PULL HAS ‘EM HOT ON HEELS; INDEPENDENTS READY SIMILAR PLANS

Surprise: Independent broker-dealers that have largely ignored the boom in Internet trading aren’t all that far behind Merrill Lynch & Co. Inc., Prudential Securities and other big brokerages in confronting the online competition.

Raymond James Financial Services is testing a fee-based asset management program that would let clients trade online with the adviser’s permission. LPL Financial Services Inc., the nation’s largest independent broker-dealer, with more than 3,000 brokers, is said to be looking at online trading services as well.

And 535-broker Investacorp Inc. of Miami Lakes, Fla., this week takes an even bolder step: It’s offering its clients the ability to trade stocks, bonds and mutual funds over the Internet at $19.50 a transaction — down from its traditional stock commission price of several hundred dollars a trade.

upping the pressure

Investacorp’s new program includes an advisory fee that is similarly structured to a $25-a-transaction deal unveiled last month by Prudential (InvestmentNews, May 17). Coupled with Merrill’s announcement last week of $30 Internet trades, Investacorp’s move ups the pressure on other independent brokerages to offer all clients cheaper action online.

“Everybody in the independent broker-dealer industry is rushing to figure out a way to offer Internet trading,” says Larry Papike, head of Cross Search Inc., a recruiter for independent brokerages. “It’s the in-vogue thing of the week.”

Like the biggest Wall Street brokers, independent brokers have resisted the plunge into Internet trading. Their reasoning: the online do-it-yourselfer is not the type of client they want.

Of course, another hindrance is finding a way to allow clients to trade online without cutting into the revenues of independent brokers and their allied firms, which still depend on pricey commissions.

Now that heavyweights like Merrill Lynch and Prudential are moving into cybertrading, independent brokerages must join the fray.

“If independents want to continue to attract brokers from the major wirehouses, they need to be able to offer all the technology wirehouses offer — online trading being one of them,” says Russ Alan Prince, an investment industry consultant in Stratford, Conn.

The driving force: increasingly affluent baby boomers who want the option of trading online. By the end of this year, 19% of households that have $750,000 or more to invest will be trading stocks online, up from 5% in 1997, predicts Cambridge, Mass., consulting firm Forrester Research Inc.

This is a departure from the older rich, who grew up in a full-service, commission-based environment. Indeed, sources say the average Merrill Lynch customer in what are internally called “priority” accounts — those with at least $1 million invested — is 67.

To appeal to the new wave of investor, both the wirehouses and the independents must remodel their pricing and go online.

Merrill set a new standard last week by offering unlimited online trading for $1,500 through a fee-based account, and beginning in December, pay-as-you-go Internet trading for $29.95 a trade.

Investacorp’s new program ties online trading into a fee-based program. Besides the discounted trading price, the client pays an advisory fee that starts at 2% for clients with at least $37,500 in assets and drops to 1% for clients with at least $75,000.

The program is similar to one launched last month by Prudential, which charges $24.95 a trade plus an advisory fee of between 0.25% and 1.5%.

The idea is to offer discounted online trading as part of an arrangement that still generates revenue for the broker and the firm.

“This way,” says Scott Sherwood, chief operating officer at $250 million asset Investacorp, “we get to offer deep-discount trading packaged with the advice and counsel of our brokers, so that they can still make a living with the same revenue stream.”

Expect other independent brokers to follow suit — and soon.

The Raymond James broker-dealer operation, which includes the former operations of Robert Thomas Securities Inc. and Investment Management and Research Inc., is now tweaking its fee-based online test program.

Clients would trade online with the adviser’s permission, confirms a spokesman. The Atlanta-based operation, which has 2,350 brokers overseeing $8.8 billion in assets, hopes to offer the service by the end of this year. (The Raymond James broker-dealer unit is separate from a full-service brokerage run by parent Raymond James Financial Inc. of St. Petersburg, Fla.)

Top executives at LPL Financial Services of San Diego, which oversees $10 billion, also are investigating online trading, according to an internal source. A company spokeswoman did not return calls seeking comment.

fees will spur more revenue

Offering online trading as part of larger fee-based agreements is the latest response to the industry’s long-bubbling shift away from commissions. At Investacorp, Mr. Sherwood says only 5% of the revenue generated by his company’s brokers is currently fee based, but fees are expected to account for as much as 50% of revenue in a few years.

“It’s a matter of letting your clients pay you for the things they want,” says Mr. Sherwood. “This is where things are heading.”

Steve Gresham, an industry consultant in Madison, Conn., agrees that online maneuvers are only a symptom of a larger development — the continuing “reallocation” of the brokerage industry.

“In the one camp there is the strictly transactional broker, and in the other camp is the more consultative broker,” says Mr. Gresham. “The good news for the consultative broker is that the truly affluent want more than just information and technology.”