One on One: There are far too many online brokerages today"

That’s why the firm is expanding its operations in the United States and Canada, why it’s joining with financial services firm Tata Finance of India to launch that nation’s first online trading service, why it has entered a joint venture with Bank of Tokyo-Mitsubishi Trust Co., and why it’s opening more branch offices in Australia and Hong Kong.

“Continental Europe is what we have our sights set on next,” says Mr. Petrilli, who has been Waterhouse’s president since 1995.

Of course, in his quest for the top spot, the 49-year-old Mr. Petrilli will be wrestling with stiff competition. It’s not coming from Merrill Lynch & Co. Inc., which, for now at least, seems to bother him not at all.

No, rival No. 1 is clearly Charles Schwab Corp. Mr. Petrilli is so intent on outshining Schwab that he called a reporter a full day after being interviewed to elaborate on the Internet-related initiatives Waterhouse says it beat Schwab to, such as simplified electronic money transfers.

With a 13% online trading market share to Schwab’s 22%, Waterhouse “has a long way to go to overcome Schwab,” observes Steve Franco, a managing director at U.S. Bancorp Piper Jaffray in Minneapolis. Still, he says, “There is no question that TD is further along in getting its feet wet overseas.”

It has already partnered with numerous financial portals to gain visibility. It’s working with Nokia to make its brokerage services available on the Finnish company’s cell phones. It’s invested in the electronic communications network Readibook and, perhaps most surprisingly, it has joined with Schwab and Ameritrade Holding Group Inc. to form an online investment bank set for launch this spring.

Q What do you think of Schwab’s acquisition of U.S. Trust Corp.?

A I think it’s a good move for Schwab. Its strategy is to replace Merrill as the dominant financial service provider and we’re delighted that it’s trying to do that. It leaves a void that we can fill: becoming the leader in the self-directed space.

Q So you haven’t any interest in making a similar move?

A Not true. Our customers haven’t been clamoring for these kinds of services but eventually we probably have to have them. We wouldn’t necessarily buy someone; we could probably partner. But we’re not feeling pressure to get that done today.

Q How many full-service discount brokerages can the market support? Could you imagine Waterhouse being acquired?

A It’s hard because [Toronto-Dominion] Bank owns 88% of TD Waterhouse, so effectively it takes us off the table. We are, however, an acquirer. Fact is, there are far too many online brokerages today, more than 150. But it’s the smaller players without scale that will have to do something to survive. Even some of the biggest 10 firms are probably consolidation candidates. We would probably make acquisitions around the world in other international markets first, but we wouldn’t rule out U.S. acquisitions.

Obviously, I wouldn’t give you names.

Q According to Credit Suisse First Boston, TD Waterhouse consistently ends up paying less to acquire customers than anyone else in the industry. How?

A We have a superior business model. We put the customer at the center. We have the fullest array of products and services that customers deem relevant. We have all the distribution channels. We have an attractive price. You don’t have to be the lowest, but customers should be happy to pay the price you charge them, and we’re in that space.

Q What are you doing to expand your e-commerce efforts?

A The data you have on customers should automatically populate the data fields of each and every one of their application processes to save them time, but that’s only scratching the surface.

On the drawing board, we’re talking business-to-business e-commerce, where potentially we can allow small businesses to use us to do their procurement.

For instance, TD Bank partnered with CommerceOne, which automates the purchase of non-production materials like office supplies. But not only will TD Bank’s procurement system be put on an e-platform, the bank can help its clients procure goods online.

Q Why do you think you were trading at a sharp discount to your peers last fall and dropping more sharply than they did when your sector took a hit?

A We went public June 23 of last year, so we were the newest of the stocks in the online Internet investing arena, and being the least well-known, you’d expect that when all the stocks fell, we’d fall the hardest.

Q How big is the Merrill threat really? The firm’s reporting $65 billion in assets already, although apparently only $9 billion from new customers.

A I have a hard time understanding all the hoopla surrounding Merrill’s entrance into online investing. They were three or four years late to the game and basically their results aren’t conclusive yet. And they still have channel conflicts that aren’t going to go away.

Longer term, I think we have a better business model and the wind to our backs, meaning the trends of the emerging investor favor us. They know they can adeptly and cost-effectively create portfolios and save for retirement if they do it themselves. That’s our main market.

Q Merrill’s model is in many ways your service model now. Doesn’t that diminish your advantage?

A This is primarily a defensive measure on their part. We were stealing a lot of their accounts.

Q What then, is the biggest threat to your business?

A I wouldn’t single out any one competitor. I really believe we have something everyone else doesn’t have. Every one of our competitors is deficient in some way when compared with our overall business model. We have the best value proposition.

Q How do you feel when Dan Leemon, Schwab’s chief strategy officer, commends you for “emulating” his firm’s strategy?

A I have great respect for Schwab. I’d say that’s good-natured ribbing. They were first; they started a firm before we did. And it certainly looks like we’ve emulated their strategy. But there are very specific areas where we’ve led.

When we launched our online investing program in January 1997, Schwab had a model in which its online effort was separate from existing discount brokerage accounts. We came out and said, no, you need to offer one account that allows customers to access you any way they want. Sure enough, a year later, Schwab gravitated toward our model.

We also attracted an investor who was interested in holding equities primarily, whereas Schwab built its business on being an asset-gatherer. But the wave of online investing favored us; we were more visionary about the movement of investors toward individual equity holdings.

Q Schwab launched a separate account program shortly before yours. Is yours enjoying much success?

A We have 20 money managers and 50 different portfolios. I’m not sure how successful Schwab has been; we’ve seen pretty good demand from advisers who’ve looked at it. As people get older and their assets grow, they gravitate more toward ownership of individual equities, so we expect Managed Assets Network will be a big driver in the growth of our business.

Q Tell us more about this Silicon Valley investment bank you’ve opened with Schwab and Ameritrade.

A We need, in our franchise, to provide our customers with high-quality IPOs. When tech companies, primarily, go public, our customers end up owning a very large percentage bought through the secondary marketplace. So there was a gap in our business model and the only way we were going to close that gap was to be aggressive and form this bank with Schwab and Ameritrade.

Fairview Partners is a name we’re using internally, but we haven’t officially named the bank yet. We’re still waiting for licenses, and I’d think sometime in March we could be ready for business. And we’re focusing on software providers, Internet-related companies, and telecommunications equipment companies.

Q You nearly left TD Waterhouse last year for a position as president of E*Trade’s securities arm. Any regrets?

A Not at all. I only regret that I was so rash. I regret having gone through that process where someone in my position would have made such a hasty decision in his career. If I could take it back, I would. It’s no reflection on E*Trade. I’m just a Waterhouse person through and through.

Vitae

Frank Petrilli, 49, president and chief operating officer, TD Waterhouse Group Inc.

Education: B.S., MBA, Fordham University

Experience: Seven years as president, chief operating officer, American Express Centurion Bank; 13 years as a manager at Colt Industries Inc.

Assets under management: $122 billion; advisers using firm as a custodian: 2,800; customers: 2.2 million; accounts through advisers: 97,000; clients using advisers: 6%

Branch offices: 165 in U.S.; 210 globally

Cost per trade: $12 online, $45 average offline through an adviser

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