'Discount broker' label obscures many varieties

October 26, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services Inc.

The modern age of discounts encompasses everything from apparel to vacation trips and laundry detergent.

So it's understandable that bargain-hunting investors don't want to pay full price in a market that gyrates with every rumor about the likely course of inflation and interest rates.

Discount brokerage firms that don't offer advice -- as the higher-priced, full-service brokers do -- continue to gain market share in the current frugal and unsteady environment.

They've grown from less than 5 percent of the brokerage mix a decade ago to more than 14 percent today.

Do-it-yourselfers should bear in mind that all discounters are not alike. It's true that average transaction costs are going down thanks to competition.

But, as in many industries, some discounters now offer more bells and whistles and therefore charge a higher price. Others remain no-frills "deep" discounters.

Whenever people ask for the name of a discount broker, they should be aware that prices and services vary considerably among the 100 or so firms that carry that moniker.

For example, a typical transaction to buy 100 shares of a $50 stock recently cost $105 at full-service broker Merrill Lynch & Co. of New York. Personal advice and hand-holding, important to many, are part of that price tag.

By contrast, that transaction would cost $55 at discounter Charles Schwab & Co. of San Francisco; $54 at Fidelity Brokerage Services in Boston; $49 at Quick & Reilly of New York; and $40 at Olde Discount Stockbrokers of Detroit.

But the least expensive deep-discount brokers for that same transaction were Wall Street Equities of Omaha, Neb., at $24, and Lombard Institutional Brokerage in San Francisco at $27.50.

Pacific Brokerage Services in Los Angeles, Security Brokerage Services of New York and Brown & Co. in Boston all handle that transaction for $29.

Carefully check fine print in the brochure you receive from a firm to determine whether there are hidden fees for postage, handling, transfer to another firm, research reports, bank wire and a variety of other services.

Most deep discounters emphasize telephone transactions, while other discounters also feature branch offices and longer transaction hours.

"Our customers have come to rely on high-quality execution and low prices but also expect asset management accounts, information and access to a full product line that includes precious metals and annuities," said Donna Morris, senior vice president at Fidelity, which has 79 branch offices. "We look like full-service firms in terms of service, with the exception of actual investment advice."

There's a new wrinkle that's gained attention. Olde Discount Stockbrokers recently dropped the commission altogether on some transactions. Its new Smart Trading program requires trades of 1,000 shares or more with a minimum share price of $5.

How does it do it? In order to qualify, trades must be in stocks recommended by Olde analysts. The list, which changes on a regular basis, includes the stocks of about 200 companies.

This basically permits Olde to unload an inventory of securities in which it is a market maker, allowing it to garner profits between the bid and asked prices even without charging a commission.

"We're a low-cost producer and derived the Smart Trading program from another commissionless program of ours that requires an account balance of $500,000," explained Randal Mudge, director of Olde, which has 200 branches.

"However, our overall business is not at the bottom end of the discount scale and you won't see our advertising fishing to that bottom level as some other firms do."

Don't expect competitors to pick up on this new program. "The Olde program is recommending stocks it has in inventory, which is exactly the opposite of how our firm does business," said Tom Taggart, a spokesman for 206-branch Schwab, who believes Olde also will use the opportunity to make additional money by pushing trades on margin as well. "We see a conflict of interest when you're pushing securities that you also hold in your own inventory."

Firms have adapted to new competition. Fidelity's Spartan service is a deep-discount operation for clients that trade at least 40 times each year through the company.

"We don't expect commissions to go any lower at this point because not much money is being made when they're so cheap," observed Mark Coler, editor-in-chief of Discount Brokerage Survey, which tracks the commissions of discount brokerage firms and provided the rates listed earlier in this column.

"Some firms are just trying to compete and hope some other firms can't stick it out as long."

Discount Brokerage Survey's rankings of the top 30 discount brokers will be available in November. A complete directory of firms also will be offered. These publications cost $34.95 apiece, or can be purchased together for $54.95.

To order, contact Mercer Inc., 379 W. Broadway, Suite 400, New York, N.Y. 10012. The toll-free number is 1-800-582-9854.

"We were the first member of the New York Stock Exchange to offer discounts to the public in 1975, and our service guarantee says we'll gladly refund your commission if you're not pleased with service," concluded Thomas Quick, president of 103-branch Quick & Reilly. "Discount isn't a negative, for our execution and service are second to none."

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.