E*Trade Continues To Adapt

While this spring’s severe market downturn has hit most Internet stocks
hard, it has delivered a double-whammy to online brokers.

Not only are the stocks of all online brokers down substantially this year,
the brokers’ main source of revenue – transaction fees – is expected to
diminish significantly over the next two quarters or more as battered day
traders and individual investors lick their wounds and wait for a new rally.

One way to compensate for lighter trading volume is to lower transaction
fees, something brokers such as Ameritrade have
done to lure new customers. But the brokers with the cheapest fees already
are working on low margins. Also, it’s not likely that saving an extra $4
per transaction is a big enticement to investors who have lost thousands of
dollars on stocks in the past two months, along with any false sense of
omnipotence.

No, the watchwords these days are caution and research (of course, they
should have been all along, but that’s a different story). Thus, smart brokers
focus on providing the kinds of services that help investors to make the
right decisions.

E*Trade Group is one
of the smartest ones. On Monday, the No. 2 (and climbing fast) online broker
announced a joint venture with consulting firm Ernst & Young to offer
financial advice to its banking and trading customers.

E*Trade is betting that the $25 million it is sinking into the venture will
generate a significant return on its investment and enable the company to
better compete against the “bricks and mortar” full-service financial houses
such as Merrill Lynch and PaineWebber which are aggressively courting
business through their own Web sites.

The deal with Ernst & Young is hardly E*Trade’s first foray into expanded
services. This year alone, EGRP has:

* Announced a partnership with Web site DirectAdvice.com to offer financial
planning services.

* Purchased Card Capture Services, a company with a network of 8,500
automated teller machines throughout the U.S.

* Launched E*Trade Bank, offering federally insured online banking services.

Will these moves help E*Trade’s stock regain any ground in the near-term?
Probably not; the lighter trading volume has led to downgrades among online
brokers, including EGRP, which likely will cause investors to shy away.

Long-term, however, look for these expanding services to build more quality
business for E*Trade. This is one online broker that is making all the right
moves.