Battling for Web Investors

Let's say you wake up $2 million richer tomorrow. After a spectacular rendition of "Take This Job and Shove It" and a night of partying, you're determined not to blow it all at once. Instead, you're going to invest, then pay for the kids' college tuition, a Porsche, an island vacation home - you want it all.

With your new spare time, you decide to invest the money through an online brokerage, but which one do you choose?

You want the one with the fastest and most accurate trades, a record of fantastic system uptime and customer response, easy navigation and usability tailored to your needs -in short, a site that won't inhibit your ability to convert that $2 million into a cool $20 million or more.

Two recent surveys of the online brokerage industry conducted by market research leaders show that the companies leading the pack are Charles Schwab Inc. and Fidelity Investments. In one survey, Lincoln, Mass.-based Gomez Advisors Inc. ranked Schwab the top online brokerage for the second straight quarter. In the other, Agoura Hills, Calif.-based J. D. Power and Associates gave the nod to Fidelity.

While the firms' origins and management styles couldn't be more different, they have both managed to stave off a bevy of online brokerage houses that are trying to entice customers with a wide range of incentives, from dirt-cheap trading commissions to all-access research. These upstarts are willing to do anything to undercut the two giants' commission prices and to try to outmarket them.

"Fidelity and Schwab are . . . much more driven by service and delivery of information and education, and that's what makes them leaders in the industry," says Nancy Salk, J. D. Power's director of research.

So where should you invest?

To figure that out, we looked at four key competitive areas for the two firms: leadership, core technology, Web site ease of use and customer satisfaction.

Who's in Charge of Your Money?

The differences start at the top. Fidelity's chairman and CEO, Edward C. Johnson III, is the son of the founder; his daughter Abigail, who owns about 25% of the company, is a senior vice president. The company was founded in 1946 to handle mutual funds. Fidelity - notoriously private and privately held - tends to promote from within.

Last year, Fidelity's net income was just over $1 billion; it reportedly spent more than $1.5 billion on information technology - though not all on its online operations. Highlighting the importance of courting and retaining customers to maintain its profit margins, Fidelity has a state-of-the-art usability lab, which includes sophisticated gaze-tracking technology to see where users are looking on a Web page.

But Boston-based Fidelity is much more than just an online brokerage, and it's struggling to bridge its multiple lines of business into what customers are asking for: an aggregated view of all their accounts online.

In contrast, Charles R. Schwab founded his discount brokerage in 1986. By 1997, it had joined the ranks of the top online brokerages. Today Schwab manages a staggering 42% of all online assets - handling more than twice the volume of its nearest competitor. Last year, the company had net income of $588.9 million. It's also one of the top sellers of mutual funds - including Fidelity's.

Mr. Schwab has always been characterized as a very hands-off guy, and he has a reputation for reinventing the company as often as necessary. Recently, that meant acquiring CyberCorp Inc. in Austin, Texas, for its cutting-edge order-routing technology, and New York-based U.S. Trust Corp. for its high net-worth individuals.

Like Fidelity, San Francisco-based Schwab relies heavily on its real-world branches, where more than 70% of new Schwab accounts are opened.

So which CEO is most effective at enabling his company to respond quickly to changing market conditions? Last year, Fidelity consolidated responsibility for all of its online services into one position, filled by Steve Elterich, president of Fidelity's electronic business, who reports directly to the chief operating officer. Since Fidelity is, in essence, a number of different companies set up to manage investment vehicles such as 401(k), 403(b) and brokerage and mutual fund accounts, Elterich's position reveals clearly how Fidelity views the Web from an organizational standpoint: as one unit.

Advantage: None. Let's face it, these two companies are performing incredibly well. While Schwab tries to get ahead on the Web by any means necessary - including acquisitions - you can't fault either firm.


The first two things an online trader needs to know: Will the Web site be live anytime I need it, and how quickly will trades be executed?

Here, no brokerage firm's shirt is clean. In their rush to court more investors, most brokerages haven't been able to keep up in times of peak usage, such as when the stock market declined in the spring. "As a whole, the industry did not fare well in what we would call the industry's first stress-test in March and April," says Salk.

During that time, the more brokerages grew, the slower their sites ran. As a result, customer satisfaction dropped, though Salk says Fidelity's customer satisfaction ratings dropped less than would have been expected, based on its growth.

Each new investor represents new revenue potential for brokerages - but only if that investor keeps a lot of money in his accounts or trades frequently. Regardless, having more investors requires brokerages to beef up their server and computing power. And while massive mainframes power the Fidelity and Schwab sites, there are still scalability bottlenecks, especially with the middleware that marries legacy systems with Internet front-ends.

Schwab, in particular, is trying to solve real-time order handling and scalability issues other sites can only dream of. That's because it runs the world's largest e-commerce site, handling an average of 293,318 trades per day in the second quarter of this year. Schwab is followed by Menlo Park, Calif.-based ETrade Group Inc. (with 214,573 trades per day), New York-based T. D. Waterhouse Group Inc. (182,336) and Fidelity (156,583).

But last year, Fidelity spent far more on its technology needs than did any competitor. While not all of that $1.5 billion was directed at its online brokerage, Fidelity does have economies of scale. For example, as its engineers discover ways of making its 401(k) servers move faster, those discoveries can often be applied to brokerage, mutual fund and other departments, improving overall site performance. That's one benefit of being very big.

It seems to be paying off. "For the much more technical aspects in our study, Fidelity comes out as the winner," says Salk. "Some of their standout points are execution time and response time."

"If [Fidelity] wants to do something, they do it themselves," notes Jason Lind, an analyst at U.S. Bancorp Piper Jaffray Inc. in San Francisco. "They might not be first to market, might not make the flashiest press releases in the beginning, but [they] have a tried-and-true product in which they're confident, and I think that shows."

Nowhere is this more evident than in Fidelity's wireless services, which far outpace those of all other brokerage firms, says Lind.

Schwab has taken a similar homegrown approach. "More than 90% of the transactional side of our software development is done in-house," says Vincent Phillips, Schwab's senior vice president of electronic brokerage. But when Schwab wants to get new functionality much faster, it's willing to do whatever it takes to get there.

In a move earlier this year that defied analysts' expectations, Schwab bought the day-trading firm CyberCorp, gaining intelligent order-routing software. The software can comb the Nasdaq Stock Market and electronic communications networks to find the best stock price to execute a trade. The move bolstered Schwab, whose $30-per-trade fees are more than double those of its competitors, in the lucrative day-trading market. Lind adds that Schwab is two years ahead of its competitors with order-routing technology. But just as with Fidelity's wireless services, consumers aren't yet crying out for order-routing, Lind notes.

Advantage: Fidelity, whose unparalleled $500 million annual research and development budget could give it a long-term site uptime edge.

Site Navigation and Ease of Use

One place to start building an online brokerage is with novice users, and both firms have unveiled significant educational resources, interactive life-goal planners and "sandboxes" - places where people can test things out and see the consequences of their actions before jumping into the real thing. But users need to be able to find such features.

Here, Schwab's site takes the edge.

J. D. Power's Salk says Schwab's "ease of navigation through its site" gives it strong marks. "Schwab does very well in the actual online tools, like online portfolio monitoring and management," she says. "\Fidelity had obvious site navigation problems that they have taken great strides in improving."

Fidelity has a greater breadth of offerings on its site than Schwab. An individual who has an online brokerage account with Fidelity might also have a corporate 401(k) or mutual funds.

Here's the rub: The more features that are offered, the harder it is to use a site, says Shalin Patel, a research analyst at Gomez Advisors. "Fidelity has a lot of information on their site, and I think going forward, they basically need to integrate their whole offering to make it more streamlined for the consumer to use," he says. "At Schwab, on the other hand, navigation and usability is easier, for the most part."

While acknowledging that Fidelity's navigation isn't ideal, Elterich says that "in the fall, we will be coming out with a new navigational approach" that will eschew the e-commerce metaphor of using tabs currently in vogue at sites such as and instead will use something more innovative.

Fidelity's usability lab, the Fidelity Center for Applications Technology, is a powerhouse and includes cutting-edge technology previously found only in military or university settings, such as the ability to track where people's eyes are looking. Though that technology has its quirks (by some accounts, it doesn't even work on 30% of the population), Elterich contends that such a feature allows Fidelity to put its site design through the ringer. "Are we providing capabilities that are valuable, and are they well designed?" he asks.

Guarding its throne, Schwab says it's continuing to streamline its navigation. Its ultimate goal is a user interface that automatically adjusts its presentation based on which types of accounts - IRA, brokerage, custodial - customers have. So if a customer has five custodial accounts, a brokerage account and an IRA, the site will be able to present all of that information in one interface and provide users with suggested tools (such as debt reduction or retirement planning) in an easy-to-use fashion.

Advantage: Schwab, though Fidelity is working overtime to close the gap.

Customer Satisfaction

He who courts the customer wins - and there are many to court. In the past six months, there's been a 22% increase in the number of households coming online, according to J. D. Power. And during that same period of time, the percentage of households registered at more than one brokerage has increased from 17% to 38%.

Both Fidelity and Schwab are trying to strike a balance between their online and off-line businesses. "The challenge for us on the Web is creating graceful hand-offs," acknowledges Martha Deevy, a senior vice president who runs

But when it comes to handling customers' problems, "Fidelity has a definite strength," says Salk. Fidelity milks every possible customer interaction for Web information. "When someone calls in on the phone, our phone representatives encourage people to provide feedback on the Web, if they're using the Web," says Elterich.

Schwab pays special attention to customer requests too. Sometimes a user even gets directly connected to upper management, which maintains contact with him, even soliciting feedback if and when the feature goes live.

Schwab and Fidelity, which have solidified their off-line reputations through excellent overall customer service, are tough to separate here.

"Measuring customer satisfaction is really dicey," says Lind. Of the various studies that purport to do so, "who's last in one is ranked first in another."

Advantage: Schwab. In the future, ongoing customer satisfaction will have much to do with getting users into and out of the site as quickly as possible. While Schwab's no-frills interface has the edge there now, the bigger Fidelity is hustling to catch up.

Copyright © 2000 IDG Communications, Inc.

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