ONLINE BROKERS TURN TO — GASP — SERVICE

Here’s some indication of just how desperate the online brokerage industry has become since Merrill Lynch & Co. Inc. and other full-service giants began offering discounted trading over the Internet:

The online firms are talking about letting investors trade on their systems for free.

“You never know,” Michael Anderson, corporate vice president of discount brokerage Ameritrade Holding Corp., told a recent audience at Jupiter Communications’ Financial Services Forum in San Francisco.

“The chairman [Ameritrade’s J. Joe Ricketts] and I discussed the possibility recently. And he wasn’t kidding.”

Of course, Mr. Anderson added, “I don’t see it in the near future.”

That these firms are even raising the prospect underscores how quickly times have changed. Not long ago they were crowing about their successes at siphoning business from full-service competitors. Now, it seems, they’re eating crow.

“It was nice competing in a cocoon back in 1995,” when the Merrills of the world were still thumbing their noses at the Internet, says DLJdirect president Glenn Tongue.

“But those days are gone.”

Of course, free transactions are probably a ways off, if they arrive at all. But a call to action is needed. According to Jupiter, trading revenues as a percentage of overall revenues are expected to shrink from 70% at present to just 35% a couple of years from now.

The shift is a reflection of changing demographics. According to the research firm, the new online financial services customer is less affluent than those in the past.

The good news is that the number of trading households is expected to grow from 4 million last year to more than 20 million by the end of 2003. So even while the number of trades and commissions per household are expected to drop, assets are projected to balloon from $415 billion at 1998’s end to more than $3 trillion by 2003.

make it up on the float

Further, as trading revenues fall off, revenues from interest on margin balances, money market funds and customer assets should increase, as well as revenues from potential offerings such as mutual funds, annuities and various forms of financial advice including estate planning. In fact, according to Jupiter, these services should jump from representing 30% of overall revenue to 80% by 2003.

In a race to garner most of those new customers, online brokers are, for the first time, turning their attention away from pricing and toward two things they hope will manage to attract client assets: more advertising and better customer service.

“The game has changed,” said Jupiter senior commerce analyst Fiona Swerdlow. “Firms that want to increase revenue must look beyond transaction fees and become the primary keepers of client assets.”

Few have decided which strategy to take. For example, two years from now, DLJdirect customers will have access not only to stock trading and mortgage services, but to insurance and banking, as it moves to become a more well-rounded financial services firm. Mr. Tongue says the firm may even consider providing access to money managers.

Meanwhile, Ameritrade will remain focused on delivering trades online. “We aren’t trying to be everything to everybody,” said Mr. Anderson.

Whose tactics will work and whose won’t remains to be seen. One thing online brokers can agree on: With traditional brokers encroaching on the turf of the more than 100 online brokers in existence, never saying never is the best strategy of all.