Bargain brokers face new competition


Stockbroker George A. Brown used to get angry whenever a competitor would publish an advertisement showing that Brown's prices were higher. Not anymore. Brown, a 19-year veteran of the discount-stock trade, is bringing new meaning to the term "discount broker." Starting tomorrow, anyone can buy up to 5,000 shares through the Boston-based Brown firm for a flat fee of $29.

How cheap is that? It would cost about $300 to buy 5,000 shares at a fellow discounter and nearly $900 at a full-commission firm.

"People saw the other ads and started leaving," Mr. Brown said. "Now they can't claim to be cheaper. We're below them."

The bargain basement is getting crowded in the stock-market trade. Brokers once upon a time could sit back in their tailored suits and charge large commissions without fear of competition. But ever since the U.S. Securities and Exchange Commission deregulated commissions in 1975, a band of brokers has been challenging established firms by steadily squeezing commissions and ultimately lowering them into the dust.

Many investors have known for years that they can save hundreds of dollars per trade with discount firms such as Charles A. Schwab & Co., Fidelity Investments and Quick & Reilly. These big three discounters and their competitors have been adding services and becoming more like full-service firms at roughly half the cost.

But now, those discounters are being undersold by scores of firms such as Brown's. These deep discounters combine the brashness of Crazy Eddie prices with claims of efficient service and relatively few amenities.

"In order to get people, we have to compete on price," Mr. Brown said. "To hold them, we have to do the recordkeeping right. People will leave in a moment if they're not satisfied."

Earlier this year, a new firm, National Discount Brokers of New York, took out ads announcing a flat $30 fee for all stock purchases up to 5,000 shares. Brown lowered commissions even further with a flat $29 fee -- plus another 10 percent off for automated phone orders -- and a gaggle of deep discounters are close behind.

Their collective efforts are bearing fruit. Discounters last year collected 14 percent of all retail commissions of New York Stock Exchange firms -- up from 4.6 percent in 1983, according to the Securities Industry Association.

The competition has put the heat on even the most established (( firms, who quietly give customers discounts if they deal in some volume.

In general, the savviest investors benefit most from discounters. "A discount broker is for somebody who fully understands what he's doing," said Mike Patitucci, first vice president of Janney Montgomery Scott Inc., a full-service firm based in Philadelphia. "For somebody who is not as sophisticated, they need a full-service broker. A lot of people think they know what they're doing, but sometimes they don't know the full extent."

The differences between the two types of firms can be dramatic. Full-service brokers often work on commission. They have a financial incentive to sell stocks to customers, and they sometimes have to move securities the firm itself owns.

Discount brokers with some exceptions are salaried and merely take customer orders. They generally don't give advice and don't assume the same degree of responsibility for their customers' accounts as full-service brokers.

The result is that discounters generally produce fewer customer complaints than full-service firms, mostly because the role of discounters is typically narrower.

"I've heard very few complaints against discounters," said John Markese, president of the American Association of Individual Investors, which provides consumer information to 170,000 members.

Discounters also are riding demographic trends. "There's a huge and growing marketplace out there of investors who are taking ** control of their own finances," said Lawrence M. Waterhouse, CEO of Waterhouse Securities, one of the fastest-growing discounters. "It's sort of the coming of age of the Baby Boomers."

Schwab remains among the most recognizable names in part because with over $1 billion in 1993 revenues, it's the nation's biggest discounter. When deep-discount firms make price comparisons, they usually include Schwab as the high-end comparison. Schwab, however, has developed cash-management and other services its executives believe are worth the price.

"The fundamental concept that Chuck Schwab evolved is that this is a safe haven for investors," said Hugo Quackenbush, a co-founder of the firm and now senior vice president. "We'll help you with information, but we're never going to sell you anything. We're never going to have inventory that we'll have to unload. There'll never be an incentive to an employee to have you buy a Schwab mutual fund over another."

Schwab developed the One Source account, which allows investors to move money among more than 200 mutual funds at no cost and little fuss. That option -- which has attracted over $10 billion in two years, Mr. Quackenbush said -- has been copied by Fidelity, Waterhouse, Jack White and many others.

The prices of both Quick & Reilly and Fidelity usually fall a few dollars below Schwab's. And like Schwab, both Fidelity and Quick & Reilly have regional offices and a host of services to enhance their discount status.

"We have a very personal relationship with our customers," said John Crofton of Quick & Reilly's Philadelphia office. "Some of our competitors have telephone systems throughout the country, and you could conceivably talk to a different broker every time."

Olde is the country's fourth-largest discount broker, but it's really a hybrid of full-service and discount. Olde seeks to offer the research and advice of full-service firms at discount prices. Its salespeople are on commission and will make phone calls to customers to sell securities -- an unusual practice in the discount industry.

Deep discount doesn't mean no services. San Diego-based Jack White & Co. is known for its innovation; it enables investors to get into load mutual funds through its Connect program at a fraction of the usual cost. Customers can also trade commodities.

Copyright © 2020, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad