"To remain competitive, full-service brokerages like Merrill Lynch will have to change their prices and compensation models. ... Affluent customers are not waiting, however: 19% of North American households with more than $750,000 in investable assets told us that they intend to trade online this year."--Forrester Research, Cambridge, Mass., March 1999

If you think that online trading firms are no-frills outfits for itchy-fingered day traders, guess again. If you think they couldn't possibly match the full-service firms for product mix or research or amenities such as bill-paying services, you're wrong.

Consider National Discount Brokers (NDB). It definitely appeals to active traders with a flat rate of $14.95 to trade the same stock up to 30 times in one day. But NDB is not just a day-trading firm. This past September, it announced a partnership with Time Inc. New Media to create NDB University, described as "the first organized instructional program offered by an online broker." NDBU now has 12 lessons on investing and will soon offer 24, says Greg Sharenow, managing director. The lessons include feature stories from Money magazine, combined with retirement, budgeting and college planning calculators.

Merrill Lynch's delayed move into online equity trading for its asset-based clients (which finally debuted in early March) might be bold in the full-service market, but the online traders are long past basic equity trading. Their clients can typically get access to a wide array of investments, including mutual funds, options and Treasuries. And for the more eclectic vehicles that can't be traded online, such as unit investment trusts or precious metals, a handful of firms will take orders through a toll-free phone number.

There's more variety coming. NDB's site will allow its clients to shop for and buy term life insurance over the Web. E*Trade's site allows clients to compare mortgage rates from 60 lenders and file their applications online. It also offers the same sort of comparison shopping for auto, life and homeowner's insurance. "80% of people pay too much for insurance. The rest click here," the E*Trade page says.

Research Resources AboundTraditional firms' main argument about their better research capabilities doesn't hold water anymore. Some of the online discounters now offer such a varied and interesting range of research and informational services that it's no longer valid to say: "We've got the research; they don't."

In fact, a number of the larger online brokers offer institutional-level research, including DLJdirect, which carries research from its parent company Donaldson Lufkin & Jenrette.

In March, Charles Schwab launched its "Signature Services" program (now the lead item on its home page), giving customers who have at least $100,000 in assets or those who do at least 12 commissionable trades a year free research from Credit Suisse First Boston and Hambrecht & Quist. Other customers get a 60-day trial, after which they pay $29.95 a month for access to the full research product from both firms.

Meanwhile, Fidelity offers Salomon Smith Barney's "Daily Research Notes" and weekly "Portfolio Strategist" for a subscription fee ($50 for the daily, $20 for the weekly and $60 for both). Beyond the SSB information, customers can pick what they want from a menu of research and services provided by a number of vendors, according to James Griffin, a Fidelity spokesperson.

Some of the smaller, newer firms that don't have the access to institutional research have been creative in assembling resource centers for their clients. For instance, Datek Online has put together a page listing 16 sources for "Market Data." All of the services are free to its investors, though some are subscription products paid for by the firm.

Datek offers NewsAlert (real-time news, stock quotes and charts as well as investment research), StockMaster (top stock and mutual fund picks with message boards) and INVESTools (daily market reports and investment information). It also links to Bloomberg, CBS MarketWatch and Individual Investor magazine. "There's so much that's available on the Internet for free," says Alex Goor, executive vice president at Datek Online Holdings Corp.

Online firms' willingness to link to third-party sources makes them distinctly different than full-service brokerages, which launch self-contained sites. "The Merrill Lynch and Prudential sites have that kind of brick-and-mortar feel to them, but they're not friendly and enticing. They're much more conservatively designed," says Dan Burke, senior brokerage analyst at Gomez Advisors, Concord, Mass. Online firms' sites are "lively and much more customer-focused," he says.

The Focus on FundsMost of the established electronic traders offer a wide range of mutual funds, with a rich variety of screening tools and equally deep discounts. Many have a group of no-transaction-fee funds, modeled after Schwab's OneSource offering.

Meanwhile, neither Merrill nor its competitors at Prudential Securities and Morgan Stanley Dean Witter (which are expected to launch online equity trading later this year) have any immediate plans to add mutual funds.

Obviously, Fidelity and Schwab offer a full range of mutual fund services online. But Waterhouse Securities, a subsidiary of Toronto Dominion Bank, offers 8,300 funds online as well. Waterhouse also has its "FundSearch Group," a team of specialists who will provide investors with "helpful independent research and analysis from Morningstar and Bloomberg" over the phone, according to the firm's Web site.

NDB offers free quotes and performance reports for more than 10,000 funds, and allows investors to search for funds that meet their criteria even if they're not clients. DLJdirect allows investors to "screen, list, profile and trade" more than 7,000 funds. Discover Brokerage, a Morgan Stanley Dean Witter subsidiary, offers 5,000 funds.

Competition is lively in the fund business. Waterhouse has 1,300 funds in its no-transaction-fee program. Beyond that, its rate for a no-load or low-load fund is $24. If an investor simultaneously sells one fund to buy another, the round trip is also $24 (not including the full-load funds). Likewise, DLJdirect has its own no-fee program with more than 850 funds and charges $35 for no-load or low-load funds and $20 for an exchange between funds.

In fact, there's so much interest in mutual funds that some online firms are creating their own proprietary products. In February, E*Trade launched the first mutual fund to be offered strictly over the Internet--the E*Trade S&P 500 Index Fund. Waterhouse followed with the introduction of a Dow 30 fund.While E*Trade already offers more than 4,300 funds, screening tools and online prospectuses, it wanted to create its own fund geared toward the electronic investor, says Sheri Arapov, E*Trade's manager of corporate communications. It promises to keep expenses low by communicating with shareholders electronically so it started by promoting the product via e-mail.

E*Trade intends to add other funds, too. Entering asset management will "give us the opportunity to really expand," Arapov says. E*Trade had customer assets of $21.1 billion as of March 31.

Bonds, IPOs OnlineSites now routinely allow investors to trade Treasuries and corporate bonds--once a rare service. E*Trade has put municipals online as well. (There are other firms that offer munis, but orders have to be placed through a toll-free phone number.)

E*Trade launched its Bond Center in December 1998. It promptly got raves from Money magazine for its extensive online inventory and for its bond calculator that compares yields and creates laddered portfolios. E*Trade's Bond Center also gained favorable notice from Barron's in its annual survey of online brokers, published in March. "We listen to our customers, and that was an area of interest for them," Arapov says.

In January, E*Trade announced another Internet first: The formation of what it describes as its own full-service investment bank, E*Offering. The new business is in partnership with Walter Cruttenden III, former CEO and president of the investment banking firm Cruttenden Roth of Newport Beach, Calif. Sandy Robertson, founder and former CEO of San Francisco-based Robertson Stephens & Co., is an investor and adviser in the deal. About 50% of E*Offering's IPOs will go to E*Offering's own institutional sales force, and the other half will be available to E*Trade's customers, Arapov says.

However, E*Trade customers already had an opportunity to participate in IPOs through a relationship E*Trade established with BancBoston Robertson Stephens this past fall. Customers were able to buy shares in 26 IPOs, including eBay, GeoCities and iVillage.

Fidelity and Schwab also offer IPOs online, as do DLJdirect and Wit Capital. In December, NDB announced it would be part of Wit Capital's E-Syndicate, thereby enabling it to offer Wit's IPOs to customers. Wit is the Internet's first all-electronic brokerage and investment banking firm. It is currently in the process of going public itself.

The problem with IPOs, as full-service reps know, is getting enough shares. "It's not really a valuable thing for the customers of online discount brokers until we can get a good amount of shares to distribute," NDB's Sharenow says.

Yet Forrester Research analyst Kenneth Clemmer believes there's so much demand for IPOs over the Web that an active online underwriting business "will come to pass--it's just a matter of time."

More Services Coming SoonOnline firms aren't satisfied with just helping customers manage their investments. They want to assist with their banking, too. Fidelity launched its online bill-paying service in mid-January. Called Fidelity Bill-Pay, it will be free for the first three months. Thereafter, clients with $100,000 will pay $4.95 a month. All others will pay $9.95.

Schwab offers an online bill-paying product only to its "Signature Services" clients. However, spokesperson Dan Hubbard says the firm anticipates "that at some point in the future, it will be available to a larger customer base."

According to Burke at Gomez Advisors, there are "just a handful" of online brokers who now offer broader financial services such as bill paying or mortgages, but that will definitely increase, he says. "You have to think of the online brokers as if they were trainees," he says. "They're in the acquisition mode right now. They're not worried about account size or assets under management, but with getting the accounts and getting them trading. Once they're up and going, then the question becomes how to diversify their book of business in order to make sure they're a little more market neutral."

E*Trade's Arapov puts it another way: The firm wants to support a "new financial lifestyle that's been enabled by technology."

More than a third of full-service clients may have accounts with online brokers as well, according to a survey by Forrester Research in Cambridge, Mass.

Forrester polled 10,000 online investors and found that 3,500 also had a full-service relationship. "[They don't] completely sever the previous relationship," says Kenneth Clemmer, a research analyst at the firm. "They're supplementing it with that channel."

Bad news? Not necessarily. Discounter Quick & Reilly assigns a service rep to every account and provides online access. "The number of trades that customers execute through a broker--a person--has not declined, but the overall number of trades increases by about 10 trades a year," says spokesperson Charles Salmans.

The result: Quick & Reilly's daily volume has almost doubled, from an average of 7,700 trades a day at the end of 1996 to 14,300 now.

"Our assumption is that it's just the convenience of the Internet, such as placing trades after hours or maybe while traveling with the laptop along," Salmans says.

The phenomenal growth of Internet-based discount brokers--all 110 of them--has captured everyone's attention.

The number of online brokerage accoun ts grew by 65% in 1998 to 7.5 million, and should grow to 10.5 million this year, a further increase of 47%, according to Gomez Advisors of Concord, Mass. Meanwhile, Forrester Research of Cambridge, Mass., predicts that by 2003 more than $3 trillion will be managed in online brokerage accounts.

Low rates are driving the volume. Two years of ferocious competition has resulted in rock-bottom commissions. Brown & Co., a Chase Manhattan subsidiary, will execute an online market order of up to 5,000 shares for a mere $5. Meanwhile, it has become common to see ads for $7.95, $9.99 or $14.95 trades.

National Discount Brokers has taken rate-cutting a step further. It is offering a service called Active Trader's Advantage, allowing a client to trade the same stock up to 30 times in one day for a flat fee of $14.95. "It definitely endears us to the active traders," says managing director Greg Sharenow.

Many of the online discounters don't even bother to compare their rates to the fees at full-service firms anymore. The benchmark for high online rates is Schwab's $29.95 charge for a 1,000-share or smaller market order. That price is itself a discount from Schwab's off-line rate of $55.

Whether it's due to convenience or price, the traditional discounters' business has moved to the Internet. Fidelity was one of the first financial ser vices companies to establish a Web site in early 1995. By 1998, the majority of its trading activity shifted to the Web. Currently, 70% of its trades are placed over the Internet, a 10-fold increase from 7% at the start of 1998, says James Griffin, a Fidelity spokesperson.

Schwab established its Web site in April 1996 and experienced the same sort of shift. Between the fourth quarter of 1997 and the fourth quarter of 1998, online trading grew from 41% of the total to 61%. Schwab now has 2.24 million online accounts out of 5.7 million, and $175 billion in assets online out of a total of $521 billion.