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3/4/2006 — The Wall Street Journal

Discount Brokerage Firms Offer Incentives to Lure Customers

By JANE J. KIM

In their latest bid to attract new customers, discount brokerage firms are dangling high-end electronics, frequent-flier miles and cash.

The firms are launching the promotions at a time when investors are returning to the stock market, with the Dow Jones Industrial Average having seen its strongest first two months of the year since 1998, rising 2.6%. The number of trades by investors at discount brokerage firms jumped an estimated 30% to 40% in January from December's levels, while money flowing into stock mutual funds approached near record levels.

TD Ameritrade Holding Corp. recently began offering a Palm Treo Smartphone and 25 free trades to new customers who open a brokerage account with at least $25,000. Select customers also may be able to nab a Tungsten E2 Palm, a portable DVD player, free trades or cash.

At E*Trade Financial Corp., which is running twice as many promotions as it typically does, new customers can now get a teaser rate of 3.99% on margin loans. Certain customers also may be able to qualify for cash, free trades or a year's subscription to Morningstar Inc.'s premium research service.

Fidelity Investments, meanwhile, is offering new customers as many as 25,000 miles on United Airlines, depending on how much they deposit. The miles are available upon opening an eligible account, which must be maintained for at least a year. This is the first time that Fidelity has used frequent-flier miles in a brokerage promotion. Charles Schwab Corp. is offering new investors free trades, a tactic many companies used during the late 1990s.

Many of the deals, though, have strings attached. Customers, for example, may need to bring over big cash balances or execute a certain number of trades within a set period. At E*Trade, for example, new clients can get 100 free trades, but they must be used within 30 days of opening the account.

In some cases, the value of the gift will be deducted from the account balance if terms are broken. There is also the risk that customers will have to pay taxes on some of the gifts. TD Ameritrade, for example, will send out a 1099 form if the total retail value of the offers awarded during a tax year exceeds $600.

Another factor behind the spate of deals: consolidation within the industry, which some companies are using as an opportunity to entice investors into moving their accounts. E*Tradebought both Harrisdirect and BrownCo. last year, while Ameritrade --now named TD Ameritrade -- recently completed its acquisition of TD Waterhouse USA, the U.S. brokerage business of Toronto's TD Bank Financial Group.

"Everybody's trying to steal customers," says Rich Repetto, an analyst at the brokerage firm Sandler O'Neill & Partners LP. Firms such as optionsXpress Holdings Inc. and Firstrade Securities Inc., a closely held brokerage firm in Flushing, N.Y., are even offering to pay some of the exit fees that investors may incur by switching firms.

Many of the promotions are tied into the discount firms' expansion into other businesses, such as banking, to reduce their reliance on trading commissions. Trading-related revenues made up about 26% of total revenues at the end of 2005, compared with 54% in 2000, says Matt Snowling, an analyst at Friedman, Billings, Ramsey Group Inc. "It's not just about the trading anymore," he says, noting that discount firms often spend more time touting their banking and other services.

E*Trade is offering a three-month teaser rate on its money-market account of 4.4% to new customers and a 5.99% introductory rate on a home-equity line of credit, while Schwab recently offered a $100 credit to select customers who sign up for the credit card of its bank.

Brokerage firms are giving bigger rewards to customers who bring over more money. E*Trade is planning to expand its current cashback program by offering more-generous rewards to customers with bigger balances. Later this month, the firm plans to offer $200 to customers who bring over at least $50,000 in assets and $500 to those who bring over $250,000 in assets.

As the discount brokerage firms start to build up their banking and lending businesses, many appear to be borrowing banks' marketing strategies, which often involve product offerings. James Gresham, president of Rennhack Marketing Services Inc., a Grapevine, Texas, company that develops such promotions for banks, says that for the first time, he has been getting calls from small, regional brokerage firms over the past year.

For now, don't expect the big brokerage firms to start offering similar promotions. The full-service firms have been moving away from equity trades and are now pushing a wider variety of products, such as mortgages, insurance, financial planning and structured financial products, says Dick Bove, an analyst at Punk Ziegel & Co., who estimates that retail trading at most firms typically represents 15% or less of their total business.

Write to Jane J. Kim at jane.kim@wsj.com