Pricing & Customer Segmentation Replaces Bells & Whistles As Online Discount Brokerage Mantra

Schwab, Fidelity, E*Trade, Harrisdirect and TD Waterhouse retain top rankings on G�mez Q4 2002 Internet Discount Broker Scorecard as Brown & Co. and T.Rowe Price rejoin the Top-20 after a two year hiatus

November 18, 2002, Waltham, MA �- Internet discount brokers are making fewer feature enhancements to their Web sites and are fine-tuning pricing and customer segmentation strategies to boost top and bottom lines as the prolonged market downturn shows signs of finally abating, according to the Q4 2002 Internet Discount Broker Scorecard released today by G�mez, Inc., the Internet Quality Measurement firm.

As it has for the previous six Scorecards, Charles Schwab took the overall crown (though the site received minimal feature and function enhancements during the review period) due in part to the integration of Schwab Equity Ratings and investment selection and portfolio analysis tools. Rounding out the top five are Fidelity Investments, E*Trade and Harrisdirect, whose rankings remain unchanged from the Q2 Scorecard, and TD Waterhouse, which supplanted Ameritrade, the sixth place discount broker on the Q4 Scorecard.

Many firms are not only revamping and streamlining commission schedules to keep better customers happy but are adding handling fees for least active clients to boost revenues. E*Trade and Schwab customers are paying over $3 more for both market and limit orders, while base TD Waterhouse market and limit orders have also risen $3 since our Q2 2002 Scorecard. Base margin rates also increased 2% at TD Waterhouse and now rest at 6.75%.

Fidelity also raised the price of both market and limit orders since our Q2 2002 Scorecard; market orders jumped a whopping $7.95 once a $3 handling fee is factored in. This trend is consistent across the industry: the average cost of a 500-share market order for the 18 firms that appear in both the Q2 and Q4 2002 Discount Broker Scorecards has jumped $1.06 to $19.94, an increase of 5.6%.

Firms also continue to segment their offerings to reward their best customers and, at the same time, increase prices charged to their less active customers. �Firms have also moved to simplify their commission schedules so clients don�t need a slide rule to determine their commissions or an abacus to determine when the next trade will trigger a reduced commission,� noted Dan Burke, the G�mez Vice President of Research who directed the Scorecard process.

Following, TD Waterhouse — which historically offered a simple commission schedule that rewarded active traders — is Ameritrade and E*Trade, which have streamlined their rates to support a single-minded focus on providing the most cost-effective services to extremely active traders.

Battening Down The Hatches

Meanwhile, fallout from the extended equities markets malaise has propelled numerous firms to drop various pieces of site functionality. For instance, CitiTrade dropped client-administered, threshold-driven e-mail alerts (though its credit card and retail banking offerings have retained the service), Ameritrade dropped online billpay; numerous firms — including Wells Fargo and Banc One � have eliminated wireless trading. Functionality for functionality�s sake simply is not conscionable at this time.

While the pace of site enhancements throughout the discount brokerage space has slowed amid the prolonged downturn in equities trading and muted retail account openings, mutual fund companies and banks noticeably improved their offerings in the most recent review period.

Making the greatest leaps on the Q4 Scorecard were mutual fund powerhouses Vanguard and T. Rowe Price, which makes its return to the G�mez rankings after a two-year absence. JP Morgan Chase�s Brown & Co. (which last appeared on the G�mez Internet Brokerage Scorecard in the third quarter of 2000) and Wells Fargo�s Well Trade were also among the Scorecards biggest gainers.

�Though these firms still trail the Schwab�s and Fidelity�s from a functionality standpoint, they are putting in place the minimum functionality requirements such as the automated availability of cost basis information to ensure that they have a solid foundation for future growth,� Burke pointed out. �For example, Vanguard recently added an automated portfolio analytics tool which gathers cost basis information.�

Among the key trends detected at fast movers during the Q4 2002 Scorecard review period:

Wells Trade, which finished seventh, continues to improve its offering with further integration of market data and the inclusion of an asset allocation tool replete with e-mail alerts for asset variances.

T.Rowe Price, which ranked fourteenth, provides statement and activity histories online back to early 2000, and transactional activity-sorting capabilities, which include filtering by symbol. Brown & Co., which came in nineteenth, offers far more than $5 trades; the firm now offers streaming quotes, JP Morgan research and investment selection tools.

E*Trade, which remains in third place in the Q4 2002 Scorecard, is notable not so much for what it added during the review period but for what it removed. The firm now delivers limited transaction history and no longer provides access to institutional research reports. �This confirms that E*Trade remains decidedly entrenched in the world of the active trader,� Burke said. �The site�s lack of buy and hold functionality, advanced investment selection tools and financial planning tools available to all clients reinforces this mandate.�

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