Our Future Financial Life is Online
NY Times, Tuesday, October 11, 2005

Sometimes media headlines make using online financial services—particularly investing and banking—seem like life in a digital Wild West, but the reality is that this is a world with lots of safeguards and where the guys in the white hats keep getting smarter and tougher. Risks are manifold, threats are real, but online providers such as E*Trade, Fidelity, Wells Fargo, EmigrantDirect and many others are doing plenty to protect and enhance your life online in what sometimes seems to be an electronic wilderness.

People are becoming more and more comfortable with a financial life in this vast, evolving territory. The economics are irrefutable and the services are out of their growing pains, but they've had to grow up fast. Most observers date the launch of online stock trading to 1992 when a version of E*Trade debuted on CompuServe (a pioneering online service, now part of AOL). Online banks first sprouted as far back as 1995 (Security First Network Bank opened its virtual doors in October 1995) and soon thereafter traditional banks flocked to establish a viable Internet presence. It's a rare financial institution that doesn't offer some services online, and even if customers are not yet comfortable exposing all of their business to the Internet, they have found much to like about going digital.

Keeping up with great expectations

“Online investing is so fast, so convenient,” said Mark Meyerowitz, a registered investment adviser in West Orange, N.J. “That's why I do it.” Mr. Meyerowitz handles investments for around 50 clients and, whether they know it or not, he does his trading at a leading online brokerage (most actively recruit advisers as wholesale clients). “Online investing will make you a better investor if you are good. If you are bad, this will make you far worse.”

Online, a few clicks can dump a blue chip portfolio and buy up buckets of penny stocks. This is trading without institutional safety nets but, said Mr. Meyerowitz, for those who don't need handholding, the benefits that come with online trading are immense. Of course, speed is also a factor. Mr. Meyerowitz said that if he weren't trading online, “I couldn't do this nearly as quickly,” but he acknowledged that speed can only get you so far, as customers also expect significant savings on the cost of online services.

With this in mind, online outfits heavily discounted these services in the early days—and some even offered free money just for signing up ($50 credited to new accounts wasn't unusual). But as the industry has matured, customers want more. “Price is becoming less critical in attracting and retaining customers,” said David Kalt, the chief executive officer of optionsXpress, an online brokerage. “Customers are looking for value—not the cheapest price per trade, but the best package of services and costs.” Mr. Kalt added that particularly important to a growing number of customers is a trading platform that delivers high levels of personalized control. For instance, at optionsXpress, the software lets a customer easily place a contingent order (if the price of X reaches Y, buy Z shares). The same software allows the customer to specify a stop loss price, even a "take the profits, sell at price,” all with a little typing and a few clicks of a mouse. “Our customers say they want this control,” said Mr. Kalt.

A sign that increased sophistication is taking root in online trading is the heightened use of options, said Mr. Kalt, who noted that the majority of his customers aren't the speculators options trading might seem to attract, but are in fact using options as hedges to reduce risks in a portfolio. Case in point: an investor with 100 shares of a speculative biotech stock bought at $100 per share might manage that risk by buying puts (options that convey a right to sell) on the stock at, say, $90. No matter how far that stock plunges, this investor will lose no more than 10 percent of his investment.

"Probably 25 percent of our customers use options to speculate. The rest use them to manage risks in the equity market places," said Mr: Kalt.

He added that “half of our customers are over 50. They are sophisticated investors who want sophisticated trading tools. We continually ask our customers what functionality they want from our platform, and they tell us they want more tools, more control.” According to Mr. Kalt, this shows who is trading online today, and reveals an older generation that is comfortable in an electronic world.

“Baby boomers in particular like to feel in control and that's what online account management gives them,” said Brian Kohute, the chief investment officer with HJ Financial Group in Plymouth Meeting, Pa.

Even better, relates Mr. Meyerowitz, the Internet provides a cornucopia of research such as annual reports, performance charts and more. Much of it is free; all of it can be used to make smarter investments.

"This information was much more difficult to get quickly before the Internet," said Mr. Meyerowitz. Even a few years ago, getting a com­pany's annual report involved a call to its share­holder department, then a long wait by the mail­box. Now it is downloaded within a minute or two. And services like Google and Yahoo let investors set up free news alerts that e-mail an investor whenever company X figures in the headlines. "The Internet makes investors smarter," said Mr. Meyerowitz.