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Investors dump brokers to go it alone online
Fri Jul 24, 2009 6:12pm EDT
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By Rachel Chang
NEW YORK (Reuters) - The collapse of Lehman Brothers last September marked the start of a downward spiral for big investment banks. For a smaller fraternity of Internet brokerages, it has set off a dramatic spurt of growth.
Since the start of the financial crisis, $32.2 billion has flowed into the two largest online outfits, TD Ameritrade Holding and Charles Schwab, company records show.
By contrast, investors have pulled more than $100 billion from traditional full-service brokerages like Citigroup's Smith Barney and Bank of America-Merrill Lynch.
Of course, Americans still keep more of their wealth with established brokerages. According to research firm Gartner, 43 percent of individual investors were with full-service brokers last year, compared with 24 percent with online outfits.
And while figures for 2009 are not yet available, the flow of investors in the past 10 months has clearly been in the direction of the online brokerages, according to analysts both at Gartner and research consultancy Celent.
Joining the exodus is Ben Mallah, who says he lost $3 million in a Smith Barney account in St. Petersburg, Florida, as the markets crashed last year.
"I will never again trust anyone who is commission-driven to manage my portfolio," said Mallah. "If they're not making money off you, they have no use for you."
This trend, a product of both the financial crisis and the emergence of a new generation of tech-savvy, cost-conscious young investors, is positioning online outfits as increasingly important in the wealth management field.
The numbers reflect a loss of faith in professional money managers as small investors dress their wounds from the hammering they took over the last year, the Internet brokerages say.
"There has been an awakening," said Don Montanaro, chief executive of TradeKing, which reported a post-Lehman spike in new accounts of 121 percent. Investors now realize they alone are responsible for their money, he said.
The S&P 500 fell 38 percent in 2008 as the housing crisis turned into a broader credit crunch, bringing financial markets to a standstill and diminishing wealth across the board.
TD Ameritrade, the biggest by trades-per-day, saw a 46 percent year-on-year jump in new accounts in the last quarter of 2008 and brought in $7.8 billion in new assets.
Some of that is from "breakaway brokers", former Wall Street brokers who leave to form boutiques, directing their client trades through online platforms. But two-thirds of TD Ameritrade's $240 billion under management is from its retail business serving individuals who manage their investments.
There are 16 established Internet brokerages operating in the United States, ranging from Zecco, which advertises $4.50 per trade, to Charles Schwab, which offers a suite of options from bare bones to bespoke, including advice from in-house brokers.
Within that range, investors can choose to go it alone, access social networks where investors compare their portfolio strategies, seek paid advice, or any combination. Continued...
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