Online brokerages are facing difficult times in the bear market.
Shrinking market volumes and decreasing investor confidence have resulted in tough times for online brokerages. Last month, Charles Schwab announced it would lay off 13% of its workforce, while CSFBdirect and Ameritrade have already cut staff and are reducing advertising expenditure. Online brokerages are intrinsically tied to the equities market, so a downturn necessarily hurts them too. Continued bearish conditions will have grave implications for their long-term growth potential.
In spite of the current market malaise, analysts claim that long-term prospects are favorable for online brokerages. Online trading is still growing fast, with the number of accounts increasing by an annualized rate of 17% in February. Substantial growth is also forecast for the value of assets held in online investment accounts until 2005. Restructuring is necessary, however, if online brokerages are to take advantage of the opportunities that do exist. Restructuring could also make online brokerages less dependent on market fluctuations.
Investors want more than what most online brokerages are currently giving them. Online brokerages should diversify their product and service offerings and clearly define their target market. Charles Schwab, for instance, is currently redirecting its business in order to attract the more affluent investor and launching new products and services that clearly fit the investment profile and needs of the wealthy. Likewise, E*Trade is diversifying, offering retail and institutional brokerage, banking and asset gathering and insurance services, and about one third of the company’s revenue will come from banking this year.
Those online brokerages that manage to insulate themselves from market fluctuations through product and service diversification will significantly increase their long-term revenue prospects. Companies that continue to rely solely on delivering pure online brokerage services, however, will remain highly dependent on the market and will therefore be hit hard by cyclical downturns in the stock market and risk long-term financial difficulties, even bankruptcy, if markets go into lengthy decline.
