Discount Brokers Boast Profit in Weak Securities Industry

THE JOURNAL RECORD, April 3, 1991 | Go to article overview

Discount Brokers Boast Profit in Weak Securities Industry


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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 the investor.

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 Street behemoths.

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. …

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