Everyone’s a winner from brokers’ offers

Being a chartered accountant, I received an offer from Merrill Lynch HSBC in the mail recently highlighting an offer of brokerage free trading for six months.

Merrill Lynch HSBC are already offering Infochoice members $100 if they open an account before November 6 while other online brokers have kept up the heady pace of service developments to cater to every whim of their clients.

Without doubt, do-it-yourself investors come out on top given the broad and sophisticated services now available from online brokers that are seemingly subsidised by cheap brokerage and a stern belief that clients will reach critical mass in the near future.

More recent service developments have been institutional research, managed fund trading, consolidated reporting, stop loss orders, sophisticated charting software with several indicators, faster trade processing and consensus of analyst opinions on particular stocks. Invariably all this is offered at no extra cost to the investor confirming the deep pockets of some online brokers in times of reduced retail trading.

There comes a time, however, when the service must be able to support itself. Sanford Securities announced this week that it would be cash flow positive for the first time, while Etrade has yet to turn a profit. The immense brand presence of Australian banks has made it incredibly difficult for independent Australian online brokers to make a buck. Just look at the huge advertising spend of the likes of Etrade, Your Prosperity, TD Waterhouse, Charles Schwab and Merrill Lynch HSBC in recent times. While client numbers have grown for some, it’s probably the major type of investor attracted to the service that has seen most flagging.

Those intially using the services of online brokers were those attracted by the easy gains that could be made on tech stocks. There was a huge reality check that followed the tech stock crash that had do-it-yourself investors questioning their own wisdom in being able to pick the right stocks and also time the market. Many have fallen into the category of ‘once bitten, twice shy’.

The result is that we’re left with a slightly reduced number of online brokers who continue to encourage us to use their ever expanding array of services. The fact is we think the new features are nice and funky and we love the freebies, but until we get a few runs under our belts and have access to tools that allow effective portfolio diversification and learn about wealth creation strategies with reduced risk then fellow investors will remain conservative in the use of their online broker for some time.