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WALL STREET, CALIFORNIA: Insight for Investors | MANAGER'S
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The Virtual Brokerage

In Electronic Interaction Lies a Signpost to the Future, Jack White Says

March 10, 1998|RUSS WILES | Russ Wiles is a mutual fund columnist for The Times

When there's change taking place in the discount brokerage business, Jack White often is leading it. White founded the West Coast's first discount brokerage in 1973, and his Jack White & Co. later became the first such company to allow its customers to trade no-load mutual funds without commissions.

Lately, White has turned his attention to cut-rate stock trading on the Internet and other computer-based innovations.

White, 63, an Ohio native, started his career in the commodities-trading side of the brokerage business after earning a bachelor's degree in agriculture at Ohio State University. He briefly served as president of a now-defunct mutual fund before moving to California in 1968. Jack White & Co. was started five years later, becoming a discount brokerage in 1975 after the Securities and Exchange Commission deregulated brokerage commissions.

White's privately held firm today counts 200,000 customers and $11 billion in client assets. Discount brokerage leader Charles Schwab & Co., by comparison, has $354 billion in customer assets, and No. 2 Fidelity Investments' brokerage arm counts $147 billion in client assets.

Unlike Schwab and Fidelity, Jack White & Co. has chosen not to build a bricks-and-mortar office network nationwide. Instead, it deals with investors, and a growing network of fee-only financial advisors, entirely over the phone or by computer from its lone office in San Diego.

Russ Wiles, a mutual fund columnist for The Times, spoke with Jack White at an investment conference his firm sponsored for fee-only financial planners in late February.

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Times: Your firm has been involved in various innovations over the years, from no-fee trading of mutual funds to marketing of low-cost variable annuities. What's next for the discount brokerage industry?

White: There's a tectonic shift happening now in the brokerage business that involves two distinct yet complementary trends. One is the rise of fee-only financial advisors. The other concerns the electronic interface, or link, between brokerages and investors.

Through their personal computers, investors have unprecedented access to databases offered by the likes of Dow Jones, Reuters and [fund tracker] Morningstar. After they have researched an investment, they can place an order electronically to buy or sell. The brokerage receives, executes and clears the trade electronically, then settles the trade electronically by "sweeping" the transaction against the customer's money market fund, either pulling out cash if the investor is buying or depositing cash if the person is selling.

Eventually, people will be able to settle trades instantly and in any currency, funneling money to or from the depository institution of their choice. This will become very important because it will give people direct access to the global financial markets. For example, you will be able to buy stocks listed on foreign exchanges without the huge brokerage markups.

Times: And the other trend--the rise of fee-only financial planners and other such advisors?

White: Advisors represent a solution to the increasingly complex world in which we live. With electronic interfaces and all of this information, many people want a fee-only advisor for help in making decisions. Knowing intellectually how to pick stocks or mutual funds accounts for only about 40% of the equation for success. The remaining 60% involves having the emotional discipline to follow through on a rigid program.

A lot of people know how to pick investments but don't have the emotional discipline to stay on course. They need someone to keep them on track. More than 50% of our business comes from advisors [investing on behalf of clients], including financial planners and bank-trust departments that want to tie into our menu of no-load mutual funds.

Times: Why should people favor fee-only advisors over traditional full-service brokers?

White: The big advantage of fee-only advisors is that they're sitting on the same side of the table as customers. They have an incentive to see a client's assets grow because their compensation [usually a flat fee or a percentage of the client's assets each year] depends on how well that client does.

Certainly there are many traditional brokers who are good and competent. But if they are compensated by commissions, it creates an inherent conflict of interest for them to recommend load funds rather than no-load funds, for example.

Times: What sort of growth are you seeing on the electronic-trading side of the business?

White: In January 1996, roughly 300,000 people were placing buy and sell orders to their brokerages over the World Wide Web. By January 1997, that tally had increased to 600,000. By January of this year, it had risen to an estimated 3 million people, and we're expecting it will hit 20 million or more by the year 2000.

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