| BUSINESSWEEK ONLINE : OCTOBER 18, 1999 ISSUE | ||||||||
| ||||||||
 | ||||||||
| FINANCE
The No-Name That's Shadowing Schwab Canadian-backed discount broker TD Waterhouse is gaining on the industry leader Frank J. Petrilli doesn't let much stand in the way of promoting discount broker TD Waterhouse Group Inc. (TWE) to investors. When the firm's $1 billion initial public offering in June conflicted with his long-planned wedding at New York's Windows on the World restaurant, the Waterhouse president knew what to do. ''I flew in Saturday morning, got married Saturday night, and flew out Sunday morning,'' says Petrilli. ''Couldn't take a honeymoon.'' Petrilli has reason for such fanaticism. Although hardly a household name, his scrappy New York brokerage firm is coming on strong. Based on U.S. online trading volume only, Waterhouse shares third place with Fidelity Investments, behind E*Trade Group Inc. (EGRP) and industry titan Charles Schwab & Co. Schwab has three times as many accounts as Waterhouse's 2.1 million, and $600 billion in assets under management vs. Waterhouse's $113 billion (table, page 186). But Waterhouse, whose discount strategy is close to Schwab's, is far outpacing Schwab in account growth. Since mid-1998, Waterhouse has boosted its account tally 41%, while Schwab has grown just 19%, to 6.3 million. And based on total online and offline trades, Waterhouse is the No. 2 discount broker, claims the firm, due to the sizable business conducted in its branches and over the phone. Says Stephen D. McDonald, Waterhouse chief executive officer and Petrilli's boss: ''We're closing the gap on Schwab.'' To win investors, Waterhouse has launched a flashy $100 million advertising campaign. Full-page ads broke in major newspapers on Sept. 22. By mid-October, actress Geena Davis, Los Angeles Lakers coach Phil Jackson, and former hoops star Kareem Abdul-Jabbar, among others, will be appearing in prime-time TV ads. More substantively, Waterhouse offers $12 trades, has 160 branch offices, 3,200 brokers, and a growing global presence. And it's offering one-stop shopping for brokerage and banking services because Waterhouse is a discount broker controlled by a bank, Canada's Toronto-Dominion. Since April, customers have been able to go online to operate checking accounts, pay bills, and set up lines of credit through an online affiliate, TD Waterhouse Bank. On Sept. 15, Waterhouse unveiled a service that lets customers switch funds between their bank and brokerage accounts, so they can easily tap their checking accounts to buy stocks or mutual funds. ''Among the major brokerage houses, it's unique,'' says Russell Keene, an analyst with San Francisco-based investment bank Putnam, Lovell, de Guardiola & Thornton Inc. Yet Waterhouse's weighty ad budget and ambitious expansion plans domestically and abroad will likely trim margins in coming months. That, and slower growth overall in online trading and big new online competitors, such as Merrill Lynch & Co. (MER), is why its stock has plunged to $13 1/4 a share, a far cry from its $24 offering price on June 23. As investors see the discount brokerage world lately, Waterhouse is leading the pack down. While its stock is off 47% in the past three months, Waterhouse's rivals who do all their business online are off less--E*Trade is down about 34%. As for Schwab, it's down less than 33% and some analysts give the West Coast discounter a better shot at recovery. ''Schwab is more than just an online broker. Schwab is really an asset-gatherer,'' says Richard K. Strauss, an analyst with Goldman, Sachs & Co. EXEC FLIP-FLOP. Waterhouse, at least, can afford to battle all comers. The firm, founded in 1979 by Lawrence M. Waterhouse Jr., who remains a director, is a product of acquisitions. Toronto-Dominion Bank paid $526 million for it in 1996, then spent an additional $312 million to purchase other discount brokers, chiefly in the U.S. but also in Australia and Britain. The investment has been a stunner, since TD now owns 88.5% of an outfit with a market capitalization of about $5 billion. Plagued for a time with instability at the top, Waterhouse appears to have settled down. Petrilli, who built up the firm's online capacity over the past four years and served as its chief executive officer, quit suddenly in late July to take a top post at E*Trade after Canadian banker McDonald was installed over him. Then the 49-year-old New Yorker abruptly reversed direction in early August and was welcomed back by McDonald, 42, as his No. 2. Petrilli says he was just exhausted and ''vulnerable'' to E*Trade's enticements after taking Waterhouse through its public offering. He vows he's now back to stay. McDonald is sticking to a basic ''clicks and mortar'' style--a potent mix of online and retail-outlet marketing. Like Schwab, Waterhouse holds that online services alone aren't enough. Waterhouse plans to increase its offices to 200 by the end of next year. They will act as permanent advertising, execs say. Although Waterhouse now boasts about 1 million online accounts, 1.1 million customers prefer doing business in person at outlets such as one in New York's Waldorf-Astoria Hotel. They like dealing with the firm's 3,200 brokers--far more than online-only firms. ''They're a good firm. They have emulated our strategy, which keeps us on our toes,'' says Daniel Leemon, chief strategy officer, Charles Schwab & Co. Of course, Schwab has been a far more powerful and innovative marketer than Waterhouse. The California giant, only five years older than Waterhouse, embraced big budget advertising long before it was popular among financial-services firms. And Schwab's 7,000 brokers and 310 retail sites give it a far more formidable presence than Waterhouse. Waterhouse offers some features that it figures will steal a march on Schwab. Its $12 tab for Net transactions beats Schwab's $29.95 fee hands-down. While not as good as the $4.95 that especially active traders pay with E*Trade, Waterhouse executives argue that their high level of service makes their price worthwhile. Watch the fine print, though: Waterhouse's online investors pay as much as $45 to speak with a broker. Fidelity, like Schwab, has been losing market share to lower priced rivals, says U.S. Bancorp Piper Jaffray. But Fidelity's big base of mutual-fund customers has the potential to become active brokerage clients. Fidelity charges $14.95 per online trade, not much more than Waterhouse. Waterhouse is trying to catch industry leader Schwab at a time when the online brokerage world has never been more competitive. But with its deep-pocketed Canadian parent, Waterhouse may be one of the long-term winners. By Joseph Weber in Toronto _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
|  |
 | |
RELATED ITEMS The No-Name That's Shadowing Schwab TABLE: Chasing the Big Guys INTERACT E-Mail to Business Week Online | |||
