Wall Street's lag gives discounters pause

Cinching their belts up a notch or two, Wall Street's full-service brokerage firms are falling on lean times. Brokers are grumbling louder than their stomachs about the stock market's bland performance.

But what about those Golden Boys - the increasingly popular discount brokers? Have investors lost their appetite for even cut-rate trading?

''I've got a great buffet and nobody's hungry,'' laments H. Clinton Pollack, president of Pace Securities, a New York discount house. Clientele is still growing, he insists, but it's ''irritatingly slow.''

''I just got off the phone with a guy from Dean Witter.... It's bad all over. The public has just walked away,'' concurs Leslie C. Quick III, vice-president at Quick & Reilly Inc. in New York, one of the largest discount firms. ''Business has been down 30 percent in the last few months,'' Mr. Quick says.

Nonetheless, it appears the discount industry may not be getting socked quite as hard as the full-service houses.

This week, American Express's investment-services division, which is mainly Shearson Lehman/American Express, posted a 66 percent drop in earnings over last year. And Merrill Lynch is cutting staff and raising retail commission rates (as are a few other full-service investment firms) in response to competitive pressures and the sluggish market.

''But the typical discount firm is probably doing better than the full-service brokerage,'' says Mark D. Coler, president of Discount Brokerage Advisory Services, New York. ''The volume of trading has dropped but the discount slice of the overall pie continues to grow.''

Two years ago, discount firms accounted for 12.6 percent of the retail trade volume. Last year, it swelled to 18 percent, the Securities Industry Association (SIA) reports. The attraction, of course, is savings of up to 70 percent off regular brokerage commissions.

Of late, banks are said to account for the continued growth. In the last year and a half, some 2,000 institutions have added discount trading services. According to surveys done by Mr. Coler in November and April, banks are opening an average of 10,000 accounts a week.

Mr. Pollack at Pace Securities questions this figure. ''I just doubt it. Maybe that's what they're being told by banks, and someone like Citibank could throw around some impressive numbers.'' But he doesn't think the kind of customers they're signing up are heavy traders, and ''trading is the name of the game.''

In fact, it's not a profitmaking venture for many banks. But banks see it as necessary to hold customers attracted to bank-type services brokerages now offer. And most observers agree that the banks are competing with full-service brokerages for customers - not with other discount operators.

''Many customers had accounts with a full-service broker and a bank as well. They are finding the trading execution and service at the bank equivalent to that of the full-service brokers. And banks are becoming very clever at identifying and marketing to their high-end customers,'' says Ellis Ratner of Discount Brokerage Advisory Services.

Discounters applaud the entry of conservative, gray-suited bankers into their arena. Says Mr. Ratner: ''Banks provide a sense of permanence and legitimacy.''

Some banks set up their own discount operations. But many of the smaller banks simply take a cut of the business they funnel to discounters, which in turn provide all the back-office legwork and execute the transactions. This has helped some discount houses.

The Boston-based Fidelity Broker Services, for instance, handles both retail and wholesale discounting. President Robert L. Gould, a discount pioneer, says his wholesale business has been off only 10 percent since early this year. By comparision, the retail side has dipped some 40 percent.

''The banks are in a much earlier growth cycle (than the rest of the discount broker business). They continue to add more new business, and their customers are less aggressive traders, not as volatile,'' Mr. Gould says.

Ira Epstein, assistant director of SIA research, says the banks are winning away a few full-service customers. But he's more concerned about the profits brokerages may be losing by doing their own discounting to keep their better customers.

Still, with this stock market, everyone is feeling the pinch. The longer the doldrums last, the more talk of a pending shakeout among discounters. A large corporation with a well-padded nest is starting to look rather inviting now. ''There are some discount houses up for sale,'' affirms Mr. Coler.

A buyout is the best way to get customers now, says Mr. Pollack at Pace Securities. ''Advertising and marketing have become so expensive that buying a firm's customers is no longer more expensive.''

Quick & Reilly has a line in the water, trolling for a good buyout prospect, but prices are a bit steep yet, says Leslie Quick. ''Everybody's had a good year and a half. There's still a little difference between what people want and what we're willing to pay.''

As for staff cuts, discount firms say they're letting attrition do the weeding. ''This is a cyclical business. If you lay off good people now, you may not get them back when business picks up,'' says Mr. Gould at Fidelity.

Commission rates are being juggled, but drastic shifts are not expected. Discounters ''will elect parity rather than widen the (rates) gap,'' says Mr. Coler.

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