Online securities trading and financial services cost reduction strategies

Online Securities Trading

The combined effects of financial services companies striving to drop the cost of providing customer service and the significant rise in individual investors' interest in taking control of their own investments continues to increase the use of online securities trading. Many individual investors rely on the Internet as a means of learning as much as they can about specific investments before executing a stock or bond trade online, and this factor alone is changing the landscape of financial services. No longer needing to rely on a broker for research or informed opinions, individual investors are increasingly taking the initiative to educate themselves regarding the many options they have for investing. The progression from day traders who sought to capitalize on rapid swings in markets to individual investors who are taking more of a deliberate and long-term orientation is a major trend in this area. Financial services organizations are actively educating their individual investor clients to do more transactions online, with the hope of driving down transaction costs while at the same time cautioning them to not be preemptive or urgently short-term in their investment decisions. Financial services firms are walking a fine line between automating transactions by putting powerful investment tools in the hands of individual investors, while at the same time educating them of the financial benefits of long-term investing. This paradox for financial services firms is the foundation of their selective use of computer technologies to enable online trading.

Technological Implications of Online Trading

Financial Services firms are pursuing a wide variety of online services strategies to reduce the cost per transaction, and this cost reduction strategy is creating a series of Web-based applications that have rich functionality and features previously only brokers had available. The costs of having individual investors speak with investment representatives is significantly higher than having the question respond to or transaction completed online. As a result of the cost reduction benefits of these online strategies, financial services firms are adopting them for all segments of customers. This technological shift to online investment advice and transaction tools is being influenced by the major unmet needs of individual investors for expertly-written content on the one hand and greater control over their investments on the other. Financial services firms segment their customer bases by their net worth and projected lifetime customer value, and the lowest-value customers are routed to Web-enabled suites of applications and content portals. Those customers that have the potential of generating a higher lifetime value for the financial services firm, and as a result they are provided a higher level of service including a dedicated account representative. This segmented approach to delivering service is proving to be profitable for financial services firms.

Financial Services firms are increasingly relying on rules-based and constraint-based software applications that can tailor specific services to the unmet needs of their individual investors, offering both online investment advice and guidance on invest scenarios (AMR Research, 2003, et.al). Guided selling is ideal for low-margin, high volume products or services (Columbus, 2001, pg.1). Companies achieving best practices in guided selling are doing so by also integrating their services strategies with sales and marketing efforts. Services companies getting the highest performance from offering guided selling and online transaction tools are integrating these strategies with their Sales and Marketing efforts (Columbus, 2001, pg.2).

In addition to the cost reduction gains possible using guided selling technologies to enable the many processes and tasks that online trading requires, financial services firms are looking to these online techniques to also increase Sales. The strategic objectives for financial services firms is to reduce costs of these online trading transactions, increase the opportunity to up-sell and cross-sell additional services to these individual investors, and inform them of investment options. In many cases online trading Web-based applications are designed to provide the essential tools for capturing trades, managing price quotes, set alerts, and also define recurring transactions. Companies including Fidelity.com have specific functions on their Web-enabled applications that are designed specifically for those individual investors who are using online trading applications that have high net worth values. These tools include annuity planning and specific transactions on 401K and IRA accounts of all types, with six figure balances.

In this respect, Fidelity is in effect segmenting their customers while at the same time up-selling the services they have for high net worth individual investors.

What makes these online trading Web-based applications capable of managing literally millions of individual investor accounts while at the same time managing to keep real-time quotes and account valuations accurate in real-time is an extensive integration platform. This integration platform makes it possible for everyone working with an individual investor to see all their activity and account status. Columbus (2002, pg. 6) specifically states that the tighter the system integration, the better the multichannel management strategies in place, the higher the Return on Investment (ROI) possible. There is also a set of best practices specifically in the area of systems integration relating to making multiple channels as aligned to customers' needs as possible, and they are defined by Columbus (2002, pg. 1) as critical to the growth of selling and marketing strategies.

To summarize the technological element of online trading, financial services firms realize they can significant drop the cost per inquiry and cost per transaction by offering Web-enabled suites of applications. This is by far the most prevalent motivation for financial services firms to move online trading applications online. Second, there is the potential of having individual investors adopt higher-end services, and this strategy is called up-selling and cross-selling. Clearly many financial services firms see this as a significant revenue opportunity and are pursuing it through up-sell applications. Third, there are the research aspects of individual investors' needs, necessitating the continual stream of new content to online investment sites. To unify all these strategies there is the critical need of systems integration which is covered in the research studies referenced.

Online Trading as a Service Strategy: Inevitable?

It is inevitable that all financial services firms will have online trading applications available on the Internet. Today many of the larger firms are on their fourth and fifth generations of web-based online trading applications, and the costs of having these tools is making a significant impact in these firms' profitability. Many of these firms are also moving forward with cross-sell and up-sell strategies that link their financial services offerings to Sales and Marketing strategies, launching these services to existing customers weeks before the general public. The intent of this strategy is to drive up the total account value from the individual investors who may be holding 401k accounts across several different financial services firms. The inevitability of all financial services firms having these applications is now nearly complete as there are third party companies who offer these online trading applications out of the box, customizable for the specific needs of the firms' investor customer base and financial services firms. Companies including IBM, Oracle, and SAP have financial services practices specifically focused on delivering entire systems and software solutions in this area.

Assessing Online Trading and the Individual Investor

The most dominant needs of individual investors have served as the foundation of the development of Web online trading applications, in addition to the development of cross-selling and up-selling applications as well. While the many workflows and processes for individual investors are anticipated in the development of these tools, there are always exceptions to these planned approaches to solving problems and transactions that individual investors have. In these exceptions, which may be a one-time transfer of funds from a 401k to an IRA or to a mutual fund, the financial services firms need to create ethical safeguards to ensure the confidentiality and actual funds themselves are secure. The bottom line is that the financial services firms need to create a highly secure, customized and tightly integrated series of web-based online trading applications and tools to make sure individual investors can work to attain their investment goals.

Improvements for Online Trading as a Self-Service Strategy

There are many opportunities for improvement for Web-based online trading tools, starting with even stronger security specifically on the area of inter-fund transfers and the recording of transactions. Today many of these Web-based online applications store history only for 12 months, and do not provide an audit record back three or five years of all in-account transactions. This lack of multi-year audit capability is a major disadvantage.

The second major area of improvement is in creating more uniformly high value content for the individual investors to make more informed and prudent decisions. Coupled with this issue is the need for better life cycle planning tools specifically aimed at making the decisions of individual investors more clearly made. This area of content and guidance needs major work in the industry of financial services firms today.

The third major area of improvement needed is in the development of better guided selling applications that can be modified to support guided investing strategies by individual investors. This would be a major improvement and would alleviate incorrect decisions by many investors.

Conclusions and Recommendations

It is inevitable that online trading applications will dominate the financial services firms and the industry they comprise. For individual investors the challenge is educating themselves well enough to make sure their investment decisions will get them to their goals. For financial services firms, the challenges of retaining Web-based customers when competing financial services firms are offering comparable services and possibly a higher returns on investments based on their specific approaches to investment guidance is happening today. The bottom line is that individual investors have more control over their funds that ever before, yet in that freedom comes a high level of responsibility to make sure the advice, applications and tools they gain access from financial services firms are in fact the best match with their investment needs.