"Reforming Do-It-Yourselfers"
Full-service reps are welcoming transfers from online firms--and the reason isn't always lost dollars. In online land, weak customer support leaves investors feeling exposed.

By Rosalyn Retkwa

David Furmanski has been with Merrill Lynch in Tucson, Ariz., for about two years. "Because I’m one of the newer consultants in the office, I’m usually the one picking up the phone," he says.

Starting last April, he began getting more calls. That’s when the Nasdaq went through a major sell-off, and Furmanski saw a definite increase in the number of people wanting to transfer from do-it-yourself online brokerages.

Losing money is one motivator in seeking advice. But brokers report the lack of service and personal attention at the Internet firms has become a major problem for many online investors.

Case in point: Furmanski scooped up a client from E*Trade. Apparently, the discounter put the client on hold for an hour over a question about an order. "He just wanted to talk to a live person," Furmanski says. The client transferred two accounts--a trading account worth $100,000 and another with $500,000 in stock options.

All told, Furmanski says he’s signed up more than 10 accounts from online brokers since spring 2000, about $300,000 an account on average. And the funny thing is, not all of them have lost money with the do-it-yourself approach. In fact, some have done very well.

But the bottom line is, clients want to delegate the worries to someone else.

"They want a better quality of life, and to not worry about [their investment accounts] as much," Furmanski says.

Too Impersonal

Gary Peterson, a rep with Dain Rauscher in Rockford, Ill., has witnessed client assets go to online firms--and come back. Some clients return, licking their wounds, but many reappear because the novelty just wore off.

"They say, ‘I’ve tried it, it’s neat, but I’ve got other things to do in my life than look at the blue tube all day,’" Peterson says.

Many online investors are not that computer-proficient. And they have questions about whether an order got executed or whether a deposit was credited to their accounts on time. "They’re very disappointed that there isn’t someone to talk to when they have a concern or a question," Peterson says.

Robert Woods, branch manager for Wedbush Morgan Securities in Los Angeles, has some revolving-door clients. They took assets out to trade on their own but now they’re back.

While some lost money, that’s not the primary complaint, Woods says. "The main comment is that it’s too impersonal. They feel like they’re driving at night without headlights, so to speak," he says. "For the client who’s used to interacting with a full-service broker, the ambiance of doing it on their own is a lot more shocking than they thought it might be, going in."

Adds Peterson: "Many of our investors have had that human input from a broker for many, many years, and it’s a complete change for them to be out in the water for themselves and not know where the deep end is."

Problems, Solutions

Brokers spot typical problems with the do-it-yourself portfolios coming in from discounters.

First of all, not surprisingly, the portfolios tend to be overweighted in high-tech stocks. "When people go to an E*Trade, it’s not to buy a muni bond or a mutual fund," Woods says. "Typically, they’re trading stocks, and most are trading in the tech category."

One of Furmanski’s new clients is an attorney who was going online every morning at 6:30 and trading for two hours before going to work. He placed as many as 100 trades in that two-hour span, without ever holding a stock overnight.

"He wasn’t looking to make a killing in the market," Furmanski says. "He was just looking to protect his principal." The client was making modest profits, which would be taxed at the short-term capital gains rate.

Since the client’s primary objective was the preservation of capital and since he was in a high tax bracket, Furmanski helped the man do an about-face. He guided him to invest in municipal bonds. The move not only gave him tax advantages but also "a sense of security about his investments," Furmanski says.

Chris Walling, sales manager at Salomon Smith Barney’s Cincinnati, Ohio, office, is helping a new client sort out his portfolio of high-tech start-ups, all purchased online. The individual had bought stock in about 70 tech companies.

"He did a great job of buying companies, but he didn’t do a good job of selling," Walling says. The client was traveling a lot and didn’t have the time to watch over some large positions as he should have.

Walling helped the client put together some sell disciplines and diversify the portfolio by adding financial and health care stocks.

The client was also interested in shorting and buying options, "but didn’t do a very good job of either on his own," Walling says. He had once shorted Yahoo at 100 only to see it go to 300, and hadn’t dabbled in short selling since. Walling showed him some more conservative call-writing strategies. "That was perfect for him--it was something he didn’t know how to do."

"The use of options to hedge positions is typically something a client doesn’t do on his own," Woods agrees. In situations where high-tech stocks can lose ground rapidly, the use of puts as insurance can allow a client to "trade aggressively, but also trade smart," he says.

Another thing that typically doesn’t occur to clients is to buy more of a stock that’s just sold off. "Usually, when a stock has gotten decimated, the last thing the client thinks about is buying some more, but there are occasions where averaging down might make sense," Woods says.

Mixed results, time constraints and lack of service have emerged as problems with the online firms. Full-service reps should be ready to correct for those issues.

Keep the door open, Peterson says. When his clients move funds to a discounter, he tells them that they’re welcome to come back anytime. "I believe in never burning a bridge," Peterson says. "I periodically touch base with my [former] clients who are doing their own investing through the computer."

Now that the markets are volatile, "it’s an excellent time to call those investors who’ve left to let them know you’re still interested in working with them as an adviser," Peterson says.