Web Come-on?
Can higher mutual fund sales and increased money management fees offset the cost of waiving commissions on equity trades conducted electronically over the Internet? That's the intriguing - but unproven - business model of Longwood's Empire Financial Group Inc. (www.lowfees.com), a seven-year-old stock brokerage that began offering commission-free Web trading to certain customers in January. Empire President Kevin Gagne says he is using the commission-free offer as a loss leader to attract new customers to the firm. In the process, Gagne hopes to position Empire as a hybrid firm that will compete with discount brokerages such as Charles Schwab as well as full-service firms such as Merrill Lynch, the nation's largest securities dealer. "Even the wire houses see the future in on-line trading," says Gagne. "At the same time, the deep discounters keep lowering their flat rates, so why not go to where the market is eventually going? Why not be market leaders?" While the Financial Times heralded Empire's move as one that "demonstrates the efficiency of electronics securities trading and highlights the growing threat to traditional brokers," at least one competitor suggests the move is nothing more than a bait-and-switch tactic that will turn off sophisticated investors who are drawn to Internet trading precisely because they can sidestep sales pitches for other brokerage products. "They work for free - and they're going to advise me on my investments?" questions Larry Kase, research analyst with Executive Securities in Altamonte Springs. "Are they idiots, or do they have another agenda?" While some may question Empire's strategy, there is no question that information technology is having a profound effect on stock brokering, although, as Empire's requirements suggest, there still are a number of hurdles to be crossed. Electronic stock trading is growing so quickly that some brokers predict half their stock transactions will be done at a discount over the computer by the turn of the century, according to Dow Jones News Service. For his part, Gagne hopes Empire's revenues will grow as Internet trading grows. At the end of 1996, Empire had $4 million in revenue and 10,000 customers and was accommodating about 350 trades per day. In 1997, revenues could double, to $8 million, while the volume of trading could triple to 1,000 trades per day. Internet trading will account for much of that increase. Empire now has 24 employees scattered in branches in Cocoa Beach, Delray Beach and Sioux City, Iowa, an office acquired when Empire acquired an independent broker-dealer that was having difficulty with capitalization requirements. The company hopes to hire 20 more by mid-year. In mid-January, Empire moved into a new, larger 3,700-square-foot office in Longwood's Sanlando Center. A national advertising campaign is set to begin this month. Currently, only about two percent of Empire's customers are even interested in on-line trading, Gagne says. And only about 12 percent of current transactions would qualify for commission-free trading: Customers must buy at least 1,000 shares of stock worth at least $5,000 and must have a balance of at least $10,000 in their account. Customers must have the cash in their accounts to buy any stocks in question, and they must have the securities prior to placing sell orders. Stocks must be listed on the New York Stock Exchange, American Exchange or NASDAQ. Those who do not qualify for commission-free trading pay a flat fee of $25 per trade. That compares with $14.95 per trade charged by E*Trade, the largest publicly traded on-line brokerage, for sales or purchases of 5,000 or fewer shares and with full-service firms, that typically charge 1 to 2 percent commission on each transaction. Empire also has a long list of miscellaneous "non-trading fees" that should be studied carefully before investing. For example, research reports are available from Morningstar, Standard & Poors and Value Line, but each report costs $3. Ditto for individual stock charts. While Gagne says the Web page is attracting computer-savvy individuals with a higher net worth than typical Empire customers, he also is attracting first-timers such as Norman Helberg, a 43-year-old retired Navy flight officer. "I'm just learning about trading, but I think trades on-line is the way to go," says Helberg, who now works for FlightSafety International. While there are still glitches in the system - the Internet gets slow during peak market times - Helberg says, "I see it as the standard of what's going to happen." |
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