NEW YORK (AP) - Wall Street had its worst year ever in 1990, but
somebody forgot to tell the nation's discount brokers.
The cut-rate, no-frills brokerage firms were the only segment of
the securities business to post a profit - $84 million - holding
overall industry losses to $162 million.
Led by the omnipresent Charles Schwab Corp., the firms that
provide financial market service but no investment advice, safely
weathered Wall Street's consolidation after the profligate 1980s.
As mainline firms struggle to control costs, discounters expand
with new products and technology. Investors say they view
discounters as an alternative to Wall Street's higher costs,
emphasis on sales and sullied post-crash reputation.
``Every down market we've ever had has been a period we've used
to grow,'' said Charles Schwab, who helped pioneer discount
brokerage after Congress in 1975 allowed firms to charge customers
whatever commissions they saw fit.
``Investors get disillusioned by people who promise them big
gains,'' he said. ``They come to us as a haven from the wizards.''
Discount brokers generate most of their revenue from the low
rates they charge investors to execute stock and bond transactions.
They don't recommend stocks or research companies. That's left to
There are about 80 independent discount brokerage firms
nationwide, but the industry is dominated by three: San
Francisco-based Schwab, Fidelity Investments of Boston and Quick &
Reilly Inc. of New York.
About 20 percent of all retail stock trades go through
discounters, and those amount to about 10 percent of the total
dollar value of retail security sales, industry analysts said.
Stockbrokers at many full-service national or regional
brokeragefirms often cut their commissions to attract new business,
but studies show that discount firms charge less than half the Wall
A survey last year by Mercer Inc., which tracks the discount
industry, found that full-service firms charged just over $200 in
commissions on a $9,000 stock trade, or 2.25 percent, compared with
about $92, or around 1 percent, by the big three discounters.
Even cheaper are ``deep discounters,'' firms geared toward
active traders that don't advertise much and offer few ancillary
services or products, such as mutual funds. They charged $54 in
commissions, according to the Mercer study.
The pricing gap is growing larger, analysts said, and that
apparently is attracting more investors. Schwab said it lured $2.7
billion in assets from other firms in 1990.
Meanwhile, discount brokerages accounted for an estimated 9
percent of all retail commission dollars last year, up from 4.8
percent in 1983, according to the Securities Industry Association
trade group. That would be an all-time high.
``Some of it I think is an awareness of transaction costs by
retail investors. Some of it has to do with the clear-thinking
marketing by people like Schwab and others,'' said John Keefe, an
analyst with Lipper Analytical Securities Corp. in New York.
In the 1980s, mainstream firms pumped assets into new domains
such as merchant banking and junk bonds, nearly doubled the size of
their work forces, and paid out extravagant salaries and bonuses.
The 1987 stock market crash forced the industry to realign, with
total employment falling about 20 percent. The largest firms have
eliminated or scaled back business areas, some recording losses in
the hundreds of millions.
But such expansion - and the subsequent retrenchment - didn't
occur at discount brokerages.
For one thing, discounters didn't inflate broker payouts.
Schwab, for instance, pays brokers an average salary of about
$26,000 with a bonus based on individual performance that could
carry total pay into the $30,000 range. …