A Dot-Com Grows Up

E*Trade joins the financial services big leagues w

E*Trade became a full-fledged financial services company last month when it unveiled a new brand, E*Trade Financial. Best known as one of the original online brokerages, E*Trade Financial now offers investing, banking, lending, planning, and advice (of sorts) through its revamped Web site, www.etrade.com, and at its Financial Centers and Financial Zones retail branches across the country.

The company gave a sneak peek into its new focus on Super Bowl Sunday with a television ad, and it also sponsored the half-time show. (If you didn't catch the game, you can log on to E*Trade's site and watch the commercial.) I attended the official debut of E*Trade Financial February 3 at the company's New York Financial Center. If you haven't seen one of these Centers yet, you're in for a treat.

The New York center, on Madison Avenue in midtown Manhattan, is a bright three-story glass building emblazoned with an E*Trade Financial banner that stretches across the length of the building and carries the company's signature colors, light purple and fluorescent green. The building is certainly an eye- catcher compared to its dull New York skyscraper neighbors; and the inside combines high-tech splendor with coffee-bar hipness. The first floor boasts cylindrical rooms where customers can meet with a licensed Relationship Manager, open an account, or conduct transactions in their current E*Trade Bank and E*Trade Securities brokerage accounts. A winding staircase takes you to a second floor that displays all the characteristics of a lounge; it's tricked out in high-backed leather chairs and laptops where customers can conduct the aforementioned transactions and surf the Web. Another flight up and you reach a state-of-the-art studio that offers market updates as well as a venue for journalists to meet with E*Trade execs. The top floor also hosts a coffee bar complete with laptops where you can surf the Web and log on to E*Trade's site. Current issues of The Wall Street Journal and The New York Times are also available. Frankly, I didn't want to leave.

On hand at the E*Trade Financial unveiling was Christos Cotsakos, E*Trade's CEO. He said the new brand exhibits "the next generational E*Trade." With each new generation, he said, emerges a "branded leader." In the 1950s, he said, it was Merrill Lynch; in the 1970s it was Charles Schwab. And in the 1990s, E*Trade emerged as the technology leader, building its brand in the online investing arena. Now, like other financial services firms, E*Trade is hoping to catch a portion of the intergenerational wealth transfer that's unfolding.

Cotsakos said E*Trade is well positioned financially and structurally. It now has four million accounts in three million households nationwide and $53 billion in those accounts. E*Trade has $400 million in free cash, and is the 12th largest savings bank in the U.S. The company generated $1.3 billion in revenues in 2001. And E*Trade's technology prowess and its increasing use of broadband will spark more innovation, he said.

Cotsakos said E*Trade will continue to build its brand globally. The company now has branded Web sites and operations in Canada, the United Kingdom, Australia, Sweden, Japan, Korea, Denmark, Hong Kong, and Germany.

E*Trade is sparing no expense to brand itself as a full-service firm domestically. Its financial centers, located in New York, San Francisco, Beverly Hills, Boston, and Denver, were pricey ventures, but the company is betting the centers' enticing structures and services will lure new recruits. But as Kelly O'Donnell, an analyst with Boston-based Cerulli Associates, notes, "It's going to be very expensive for them to put a lot of those investment centers out there."

But increasing its bricks-and-mortar presence is not in the cards for E*Trade, as the company plans to maintain its original mission of being a technology company catering to the Internet savvy. "Bricks and mortar is capital-intensive," Cotsakos said. "By not having bricks and mortar, you can give better rates to customers and preserve capital."

It remains to be seen if a lack of bricks-and-mortar branches will be a stumbling block for E*Trade in competing for clients against the Merrills and Charles Schwabs of the world. But Jean Capachin, research director for the e-financial division at Meridien Research, says the fact that E*Trade is going after the Internet-savvy, "and not necessarily the high-net-worth tech-savvy, gives them a broader tech-savvy base," which translates into "a less demanding group of clients."

E*Trade is trying to capture mainstream America through the less costly E*Trade Financial Zones, which are being housed in Target stores. These zones--located in select SuperTarget stores in Texas, Colorado, Alabama, Florida, Georgia, and Nebraska--allow customers to access E*Trade Bank and brokerage accounts. They also provide stock quotes, market updates, trading capabilities, and portfolio reviews, as well as financial research, news, and commentary. Video monitors broadcast E*Trade news as well as financial network news. Deposit-taking E*Trade Bank ATMs are also available, as well as more personalized services through what the company calls its "relationship specialists." E*Trade's nationwide network of 11,000 ATMs represents another tool that the company is using to expand its reach. E*Trade has also launched a new series of television ads.

Michael Vinciquerra, an equity research analyst at Raymond James, says that E*Trade's new corporate name and new front end to its now more user-friendly Web site is "more marketing splash than anything else." But, he says, "It's the right thing to do to make sure they brand themselves as a diversified financial services company, but they've been in [the process of adding new services] for some time."

Last month, E*Trade added a new Tax Center, term life insurance, and E*Trade Financial Advisor, which offers asset allocation, retirement, and education planning calculators, as well as access to Ernst & Young personal financial planners. Customers can log on to E*Trade's site and click on the "Plan & Advice" section and contact an Ernst & Young planner if they need additional guidance. The alliance with Ernst & Young, announced more than two years ago, has suffered "a lot of stops and starts," says Cerulli analyst O'Donnell.

While partnering with Ernst & Young is a "positive" move for E*Trade, "the devil is in the details as far as integration," O'Donnell says. "You really can't compare [the quality of] an Ernst & Young force to a Merrill Lynch force or even to a retail broker/dealer."

Despite a new brand and more services, O'Donnell believes E*Trade has a lot of catching up to do. E*Trade "expanded so quickly--both domestically and internationally--that for awhile they didn't have their eye on the ball in terms of what was most important in growing their retail business, and in my mind that would be to add the advice component to their transaction business," she says. "Even though they are [launching a new brand and services], they are much farther behind firms like Charles Schwab, Fidelity, or TD Waterhouse who grew up with branches and service reps. My concern with E*Trade is that they have a great brand in terms of identity, but at one point the typical customer account balance was only $14,000; compare that to over $100,000 [average account] at Schwab; E*Trade has a lot of ground to make up and I think they're late to the ball game in advice and financial planning."

O'Donnell admits that E*Trade has done "really well in banking. But I'm interested to see how they will be able to transition into a relationship business without a lot of branches and without a lot of advisors of their own."

But Raymond James's Vinciquerra says there's no such thing as "too late to the game" when it comes to advice and planning. "What you do is try and pick off some customers from other advisors. But you're also looking to get the folks who don't have an advisor yet, and E*Trade has as good a chance of catching them as anyone else."

E*Trade is planning to add its own team of advisors at some point, Cotsakos said. Vinciquerra says it will be interesting to watch how E*Trade structures this endeavor because "the whole onus for their existence is the fact that they didn't need a physical presence and didn't need a whole lot of people out there. If they can charge enough to the customer, then it starts to make sense, but you're just going to have to cover a bigger expense base from that [advisory] business than they would in their traditional business."

Like other online brokerage firms, E*Trade's brokerage business is suffering under paltry consumer transaction volumes, but Zacks Research recently placed E*Trade on its coveted Zacks No. 1 Ranked list of recommended stocks. Zacks predicts that a stabilizing market and an economic recovery will attract more investors to E*Trade's services, and that a consensus is building around projected accelerating earnings.

"Consumer transaction volumes just haven't turned around yet," says Vinciquerra, "and at the same time E*Trade's mortgage business, which has been doing extraordinarily well because of low interest rates, should remain strong for the next few months at a minimum, but it's likely to start to tail off as the refinance boom burns itself out."

E*Trade has certainly proven to be a revolutionary firm thus far, transforming itself from a little-known dot-com in 1996 to a one-stop shopping firm with a global reach today. And as O'Donnell concedes, "E*Trade will put a lot of money behind this [new business model], and if anybody has an opportunity to break into the advice business, they are one of the firms."

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