04/29/96 WITH THE WORLD WIDE WEB, WHO NEEDS WALL STREET?

WITH THE WORLD WIDE WEB, WHO NEEDS WALL STREET?
Increasingly, investors are asking that question as low-cost brokers go into cyberspace
Meet Ed Harrison, who could be Merrill Lynch & Co.'s worst nightmare. The 51-year-old Northrop engineer is a small investor who makes several trades a week. But you won't find him using a full-service broker or even a conventional discount broker.
Instead, the Santa Clarita (Ca.) resident is a loyal customer of Lombard Institutional Brokerage Inc., a tiny San Francisco discount broker that began offering trading on the Internet last September. Harrison likes Lombard's low trading fees: His previous broker charged as much as $160 a trade, vs. Lombard's $36.50. But what he really likes is to execute his own trades anytime he wants by computer and to gain access, via the Internet, to lots of free and low-cost investment information. Lombard even offers a free quote service that allows him to track a portfolio of 50 stocks. ``My broker was so nice, but boy, they were robbing me,'' says Harrison. ``All he ever did was place my trades. I can do that for myself.''
The Internet has arrived on Wall Street, and not everyone is too happy about it. Over time, the Net, a vast computer interchange accessible to anyone with a computer and a modem, could fundamentally restructure the brokerage business and grab the active traders who are the Street's best customers. The situation is similar to the mid-1980s, when Charles Schwab & Co. shook up the big full-service behemoths such as Merrill Lynch by offering discount commissions.
CAUGHT FLAT-FOOTED. The new wave of online upstarts, such as Lombard and E*TRADE, could pose a similar challenge. ``Lombard is doing a Schwab,'' says Nick Zaharias, a marketing executive at Netscape Communications. ``What Schwab did to the full-service firms, Lombard and E*TRADE will do to Schwab and the full-service firms.'' Adds Sherif A. Nada, president of Fidelity Brokerage Group: ``The Internet is a big threat to the current system. I think the full-service firms are worried about it.''
The major firms have a huge stake in the status quo. They charge high commissions that support an array of services, sprawling networks of brokers, offices, and research staffs. To keep customers tied to their brokers, the firms equip brokers with computers to execute trades and access proprietary investment information for their clients.
The Internet brokers take a different approach. They keep their overhead low by having no brokers and few offices, with the Internet allowing customers to trade on weekends and after work when brokers aren't available. The Internet also allows customers to obtain everything from stock quotes to mutual-fund rankings. ``If you can get information and trading over the Internet, why do you need a broker?'' says Gary Meshell, director of electronic financial services at Price Waterhouse. ``The firms are so afraid of giving people information,'' says Lombard CEO Eric Roach. ``Our mission is to empower the investor. All our information is for free.''
Executives at full-service firms minimize the threat of Internet trading, which they do not offer. They point out they retained most of their customers when cheaper discount brokers siphoned off business in the 1980s. And the new firms obviously lack the financial strength and credibility of the big boys. ``It's really not a concern,'' says Jay Mandelbaum, the executive vice-president for marketing who oversees Smith Barney Inc.'s Web site. The Internet just can't replace a flesh-and-blood broker's counsel. ``We find investors want ongoing advice and service,'' he says. Internet trading? ``Our clients don't want it.''
Schwab and Fidelity Investments have also been caught flat-footed by the cheaper Internet brokers. But both plan to roll out Internet trading later this year. ``Eventually we see electronic trading becoming a very dominant channel,'' says Elizabeth G. Sawi, an executive vice-president at Schwab.
At present, full-service firms appear to have little to worry about. The first quarter of 1996 produced record retail brokerage profits, and many are racing to hire more brokers. And truth be told, very few investors trade electronically--either on the Internet, which has attracted several discount brokers in the past year, or through proprietary online services. These services, which have been around for years, include Schwab's e.Schwab, Fidelity On-Line Xpress, and PC Financial Network.
REGULATORY HURDLES. Consider Lombard. Of its 31,000 discount brokerage customers, only 3,100 trade on the Internet. Forrester Research Inc. estimates there are currently just 800,000 online and Internet brokerage accounts. Forrester estimates there will be 1.2 million such accounts by 1998, but that is tiny compared with 60 million conventional brokerage accounts in the U.S.
There are also legitimate impediments that both full-service and discount firms must resolve before they plunge into Internet trading. One is security: Can money can be safely exchanged electronically? Lombard sidesteps this by billing customers the same low-tech way any brokerage firm does. ``The technology is not there,'' says Jeff Anderholm, vice-president for electronic marketing at Fidelity Investments.
Brokerages are also running into regulatory hurdles, since the industry's regulators have not kept pace with the Internet's development. For example, ``No [securities] firm lets their brokers use E-mail,'' says Pim Goodbody, vice-president of the Securities Industry Association. The industry is unsure whether to treat E-mail messages to brokers like phone calls, which are not monitored, or like regular mail, which must be read by a broker's branch manager under industry regulations.
So far, visiting full-service and discount firms' Web sites are mostly a big disappointment: They are glorified marketing brochures with little substance. Take Prudential Securities Inc.'s Web site. There is an investment personality quiz, just two research reports that must be ordered, twice-daily market commentary, and market indices updated weekly. ``It's more in the PR category than the transaction category,'' says Daniel H. Case III, chief executive of Hambrecht & Quist and chairman of the SIA's new committee on technology. ``All these guys talk about the Internet but they can't spell it.''
There are some bright spots. Last January, Prudential Securities became the first full-service broker to offer customers real-time Internet access to account information, such as market values of securities and current balances. ``All clients want to know is, how am I doing?'' says Stanley Witkowski, director of strategic client initiatives at Pru Securities. Customers now have ``three bad choices,'' he says: newspaper stock quotes, calling their broker during business hours, or waiting for their statement every 30 days. ``I think people will relate to us better if we keep them in constant touch with their own financial sources,'' says Witkowski.
CROSS-SERVICES. Smith Barney's Web site has at least a little meat. In exchange for registering, browsers are teased with a few research reports with specific stock and futures recommendations, such as the firm's top 10 stock picks, stock quotes, and instant links to other Web sites.
The full-service firms are walking a fine line. Most are simply using the Internet to maintain the client-broker relationship: offering paltry servings of investment data but no trading. There's a risk, though, that they will lose younger customers, who may prefer to trade electronically.
The big firms may also miss out on the financial services' holy grail that the Internet will make possible: brokerage, banking, and checking services all rolled into a nice neat package. If full-service brokers don't embrace the Internet wholeheartedly, banks and mutual funds with a wide array of Net and online offerings could steal their customers. Says Ajit Kambil, assistant professor at New York University's Stern School of Business: ``If firms choose not to play on the Internet, they'll be left out.'' Just ask Ed Harrison.

TABLE: THE STREET MEETS CYBERSPACE

FULL SERVICE/DISCOUNT BROKERAGE FIRMS

CHARLES SCHWAB
http://www.schwab.com
Offers online trading via proprietary software.

FIDELITY INVESTMENTS
http://www.fid-inv.com
Offers online trading via proprietary software.

MERRILL LYNCH
http://www.merrill-lynch.ml.com
Three general research reports, no specific stock picks. Delayed stock quotes.

P C FINANCIAL NETWORK
Offers online trading through America Online and Prodigy.

PRUDENTIAL SECURITIES
http://prusec.com
Account information. Investment personality quiz, two research reports to order.

SMITH BARNEY
http://nestegg.iddis.com/smithbarney/
Specific stock and futures recommendations links to other web sites. Must register first.

INTERNET TRADING BROKERAGES

LOMBARD INSTITUTIONAL BROKERAGE
http://www.lombard.com
Offers Internet trading. Free 20-minute delayed stock quotes and stock graphs.

E*TRADE
http://www.etrade.com
Offers Internet trading.

PAWWS
http://pawws.secapl.com
Financial Network. Internet trading through three brokerages.

MISCELLANEOUS

WEB FINANCE
http://nestegg.iddis.com/webfinance
An Investment Dealers' Digest electronic magazine. Links to web sites of 50 brokers.

SILICON INVESTOR
http://www.techstocks.com
A wealth of free investment information and discussion groups on tech stocks.

DATA: BUSINESS WEEK

By Leah Nathans Spiro in New York, with Linda Himelstein in San Francisco