In June, David Pottruck, Charles Schwab & Co. co-CEO, stated that the firm would be offering individual stock recommendations within a year.
A spokesperson from the San Francisco-based discount brokerage confirms that news. "We are beginning to explore ways to make that happen," the spokesperson says.
Presently, Schwab offers third-party research from Credit Suisse First Boston and Hambrecht & Quist, including daily stock updates and reports on 1,000 companies and 55 industries. For institutional clients, the company's Washington, D.C.-based Schwab Washington Research Group provides macro political, economic and industry research.
Although Schwab is still vague about exactly how it will make stock recommendations to retail customers, observers of the influential discounter say it can be done without building an internal research capability.
Chip Roame, a Schwab alumnus who now heads Tiburon Strategic Advisors, a financial services consulting firm in Tiburon, Calif., says he can envision Schwab distributing factual information and historical data on stocks. "But I would be surprised if Schwab came up with an equity research department and gave stock tips," he says.
Michael Flanagan, an independent analyst who runs Financial Service Analytics in Philadelphia, says Schwab might act as a "research coordinator" rather than develop research internally.
Dan Burke, senior brokerage analyst with Gomez Advisors, an e-commerce research firm in Lincoln, Mass., says if Schwab doesn't do the research internally, it could use existing research relationships with firms such as Hambrecht & Quist.
Although the details are unknown, Schwab would certainly be taking a compliance risk by giving recommendations. "They're walking head on into suitability of recommendations," Flanagan says. "That's a whole new ball of wax. They have to be careful which clients are acting on their advice. In a full-service firm, the filter is the broker. There's no comparable filter at Schwab."
Meanwhile, Fidelity announced in August that 12 new online reports from Lehman Bros., Primark Decision Economics, Market Guide and First Call will be free to customers through year-end. Tracey Curvey, executive vice president of online brokerage for Fidelity Investments in Boston, says Fidelity plans to offer a series of educational programs on using the research.
"Having it is not enough if the customers don't know how to use it," Curvey says.
Between the full-service and self-serve markets lies a huge universe of clients called validators, according to consultant Chip Roame. They are willing to do it themselves but want help.
Dan Burke, senior brokerage analyst with Gomez Advisors, an e-commerce research firm in Lincoln, Mass., says this middle market will be crucial for discounters. "As online investing becomes more mainstream, the bulk of investors are more planning-oriented, not active-trader types," he says. "To be successful, an online brokerage needs to offer guidance and advice."
Schwab and Merrill Lynch will be going head to head in the validator market. Merrill headed into Schwab territory with its plans to offer online trades for 29 dollars and 95 cents. And Schwab's news about offering stock recommendations is another shift toward fuller service.
"For many years, Schwab has been looking more like Merrill, giving more help, advice and tools," says Roame, a former Schwab strategist who now heads Tiburon Strategic Advisors, a financial services consulting firm in Tiburon, Calif. "Merrill Lynch offering online trading was an exclamation mark on the collision."
The result of brokerage firms' migration to the middle? "Some crowding," warns Michael Flanagan, an independent analyst at Financial Service Analytics in Philadelphia.
