January 19th, 2012
Econintersect: The bulk of securities transactions in the twentieth century were made by retail stock brokers employed by so-called wirehouses. The major wirehouses were independent broker-dealer operations, the largest of which were firms like E.F. Hutton and Smith Barney (now both part of Citigroup, NYSE:C) and the largest of the breed, Merrill Lynch (Merrill Lynch, Pierce, Fenner & Smith) which is now part of Bank of America (NYSE:BAC). These stock brokers were compensated by commissions that ranged from negotiated rates that might be as low as $50 per trade or a percentage, say 0.25%, whichever was larger, but could often be much larger for small or infrequently trading investors.
A New Breed of Broker
Starting in the mid-1990s a new breed of stock trading firm for the retail investor developed which largely bypassed the traditional broker and operated through online trading screens accessed directly by the investor himself. Some of these were hybrids, such as Charles Schwab (NYSE:SCHW) who had launched an early discount brokerage service in 1975 when virtually all transactions were “full service brokerage” and started their first online brokerage service in 1995 while still continuing primarily to provide “live broker” services.
The first hybrid was actually a year earlier when K. Aufhauser & Company became the first the full service brokerage to launch an internet trading platform (WealthWEB®. Ceres Securities, Inc.) in 1994. In 1995 Ameritrade Holding Company acquired Aufenhauser, including its internet trading subsidiary. In 2006 Ameritrade merged with another online broker TD Waterhouse to for the company that exists today, TD Ameritrade (NASDAQ:AMTD).
The Online Trader
The hybrid discount brokerage / online trading platform firm has been slowly replaced by firms that are almost exclusively online with only incidental personnel fulfilling traditional brokerage services. That is the business model today for TD Ameritrade. Other players in the online brokerage business include E*Trade (NASDAQ:ETFC) and Scottrade. Top Ten Reviews has rating page for online brokers. Eleven months ago GEI Investing Blog posted a list in order of increasing transaction costs for some online brokers. This article is open for comments from readers regarding their user experiences.
The amount of trading using a live broker has been steadily declining. According to an article today (January 18) at Investment News, wirehouse market share of brokerage assets dropped to 43% in 2011, down from 50% at the end of 2007. It is estimated the amount could be headed to 35% by the end of next year.
Part of the decline is attributed to wirehouses concentrating more on the larger net-worth client. Some of the decline is also due to advisors leaving the larger firms to go to smaller advisory firms or to open their own wealth management and advisory services practices.
Disclosures: Econintersect Managing Editor John Lounsbury was a registered rep (Series 6, 7 and 63) from 1992 to 2002, after which time he converted to fee only financial planning and investment advisory services. Today he is a client of Scottrade and has family members who use E*Trade. Econintersect lists some discount and online brokerages on its Investor’s Edge page.
Sources: Investment News and links in the article.