Monday, February 06, 2006
Conversion Trouble Part 2
WHEN WE QUERY READERS each year about what they want in a broker, we typically get 100 or so thoughtful e-mails on the subject over the course of a few weeks. This year, we’ve already heard from several hundred of you on a combination of subjects: problems with the Harrisdirect conversion; the fears of BrownCo customers as they face their upcoming conversion; and wish lists of what Barron’s readers want from their online brokers.
Following our report two weeks ago about the problems E*Trade has had assimilating the Harrisdirect customers, our mailbox filled with new complaints, revealing new issues. Sitting on hold while waiting to talk to someone in customer service remains a major complaint, but another repeated by numerous correspondents involves the rates E*Trade pays for cash balances.
One reader reported that the rate he was getting for cash was one-quarter of what Harris had been paying, and was well below 1% annually. An official at E*Trade told us that Harrisdirect customers were mapped into various FDIC-insured or SIPC-covered products based on the cash balances held in their accounts. Customers were notified of the products they were mapped in December, and were also told they could change their sweep options at any time after they had been converted. With a sweep account, the brokerage makes short-term investments with idle balances.
Harrisdirect customers were also informed in their transition letters that they had additional options, and could change their default-account options after the conversion. For legal reasons, however, E*Trade could not automatically do this for them.
There’s a tool on the E*Trade brokerage site that advises customers where to put their cash, depending on the yield they’d like to achieve. But the customers have to take some action themselves and make the change. It’s not automatic.
Perhaps much of this communication got lost amid the holiday cards in December, as the cash-account conversion appears to have come as a surprise to quite a few Harris customers. One reader reported receiving two or three letters from E*Trade every week, and ignoring many of them since the first several missives were soliciting mortgage business. He now suspects some of the letters he tossed as junk probably contained important account-conversion information—but all the envelopes, even the ads for additional services, had the same printing on the outside.
Given the number of Barron’s readers who were taken by surprise by certain aspects of the Harris to E*Trade conversion, it appears that quite a few important messages got tossed in the rubbish because they looked like ads. BrownCo customers, don’t make the same mistake. And, everybody, keep those e-mails coming about your experiences and preferences regarding online brokers.
SPEAKING OF BROKERAGE integrations, Ameritrade (http://www.ameritrade.com) and TD Waterhouse (http://www.tdwaterhouse.com) closed their consolidation deal Jan. 25. The company is now called TD Ameritrade Holding and its shares trade under Ameritrade’s ticker symbol, AMTD.
Online-brokerage customers won’t notice any changes for several months. Although the takeover is complete from a financial standpoint, the two brokerages will continue to operate as separate entities through 2006. Katrina Becker, TD Ameritrade’s director of communications, says that the integration will take about 12 months. In the meantime, TD Waterhouse continues to solicit new customers. We will review the offerings separately in our online-broker review, even though the TD Waterhouse site will no longer exist in the 2007 review.
“Ameritrade will be the platform you’ll see once the consolidation is completed. We will begin integrating key tools from the TD Waterhouse platform later this year, and plan to complete the back-end conversion in 12 months,” Becker says. This process mirrors the Datek conversion, which significantly improved Ameritrade’s offerings for active traders.
TAX TIME IS COMING. From time to time, we are asked complicated questions about how to calculate the tax basis of a particular holding when there are takeovers, spinoffs, stock splits and reinvested dividends. Some of these actions can be very difficult to track down.
GainsKeeper, which a number of online brokers have adopted to help their customers track the tax consequences of their trades, just introduced BasisPro Cost Basis Analyzer, which can be used to generate the correct cost basis quickly. BasisPro uses a database of historical information for thousands of different securities to generate the correct cost basis.
BasisPro can be accessed directly through BasisPro’s Web interface (http://www.gkis.net/basispro), or via the Web portal of a retail broker-dealer that offers BasisPro to its clients. If a cost-basis inquiry is made that the BasisPro database can’t answer, GainsKeeper’s product-support staff will provide the requested cost-basis information for that specific security within 48 hours and update the BasisPro database accordingly.
More brokers are jumping on the GainsKeeper bandwagon. We expect several announcements shortly.
Monday, January 23, 2006
Lost in Translation
THE HORROR, THE HORROR.
The conversion of accounts from Harrisdirect to E*Trade, which took place between Jan. 10 and 13, turned into a disaster. As noted here last year ("Lowering the Velvet Rope,” Aug. 15.), E*Trade Group benefited in this deal by getting the affluent clients of Harrisdirect. Those folks apparently have made out less well.
Our Electronic Investor e-mail account swelled with reports from unhappy former Harrisdirect clients, telling us of problems logging in, disappearing cash, positions reported incorrectly and hours on the phone waiting on hold after the changeover.
Jarrett Lilien, president and chief operating officer of E*Trade Group (ticker: ET), told us customers with multiple accounts linked to a single log-in had been sent materials telling them how to update their passwords. That system hit what Lilien called “a roadblock” and ran very slowly, which made customers think that their accounts were no longer available or had been lost. These customers called the E*Trade support lines for help.
The conversion also involved changing clearing firms, from Pershing to E*Trade’s own system. This required E*Trade to run both systems concurrently for three days while the data were moved over.
E*Trade had hired several third-party firms to manage some of the data conversions, and although tests prior to the conversion worked fine, on the actual date they failed. The affected customers, who thought that positions had gone missing, also called the support lines for help.
Another problem arose when the cash held in Harris accounts was moved to E*Trade. Owing to the difference in database technology, the cash was logged as transactions, which could trigger backup withholding for tax purposes. The third-party vendor hired by E*Trade had turned off tax withholding for those transactions, but apparently turned it back on prematurely.
As a result, numerous customers got a shock when they looked at their balances, thinking that a chunk of cash had disappeared. This error was fixed within a few hours, but in the meantime, affected customers flooded the E*Trade support lines to find out what had happened.
E*Trade had doubled its support staff for the week, but the series of problems generated seven times the usual number of calls. That created a huge backlog and a lot of unhappy new customers. Says Lilien: “We’re secure, the money is still there, but we didn’t handle the conversion right.”
On Jan. 15, the customers transferred from Harris received an e-mail from E*Trade that said: “Although the majority of Harrisdirect customers have migrated to E*Trade smoothly, there were customers who experienced significant frustration. To those customers, we apologize sincerely.” The e-mail said the problems that erupted during the conversion have been addressed and corrected, with the exception of the long hold times on the phone.
To make up for the inconveniences, former Harrisdirect customers will be given credit for up to five stock or option transactions that they execute between Jan. 17 and Feb. 16. We shall see whether a $65 discount in commission costs will keep these customers on board.
E*Trade’s intention in acquiring Harrisdirect, as well as BrownCo, is to be viewed as a financial partner for those with high-account balances. The firm has added Credit Suisse First Boston research for those with over $100,000 in assets, and is building out an advanced aggregator for research for those customers.
On Jan. 17, E*Trade announced that customers would be protected from online fraud via the firm’s Complete Protection Guarantee, which provides fraud coverage, bill-payment protection and privacy protection. Surveys show that customers believe that their home PCs are safe, when in fact they may be lacking some key protection.
E*Trade has enabled two-factor authentication for those who want it, which means requesting a key fob that generates a random number that the user types in to log into an account—an approach that’s used with many corporate networks. The Complete Protection Guarantee is an extension of banking protections, already in place, to the brokerage side of the business.
If you have a Brown account, should you worry about the conversion? E*Trade’s Lilien says that the Brown conversion should go considerably more smoothly because both brokerage firms already run the same computer systems. We’ll see. The switchover is scheduled for some time in the first quarter.
Monday, January 09, 2006
Not-so-Foreign Exchange
EVEN IF YOU’RE FAMILIAR with trading equities and options online, venturing into the wide world of currencies can be daunting. After all , you’re suddenly trading against professionals with your (relatively small) retail account. No less an investor than Warren Buffett, who famously bet against the dollar, can wind up on the losing end of currencies.
Into this void steps COESfx (http://www.coesfx.com), which has created an electronic-communication network for currency trading that’s patterned after the more familiar equity ECNs, such as Archipelago or Island. COESfx’s book looks like a Level II ECN, where the best bid and offer float to the top.
Mike Weiner, COESfx’s co-founder and managing partner says, “All customers—from mom-and-pop to large hedge funds and institutions—trade on the same platform. There’s no separation between platforms.”
The system takes quotes from multiple dealers and sifts through them to present the customer with the best bid and best offer. Weiner’s background is in equities, which is why the firm built its model this way.
On the main page, COESfx displays four currency pairs with real-time pricing. The firm offers 22 currency pairs, plus spot gold and spot silver. Weiner says that a key difference between COESfx and other online currency-trading firms is that his firm doesn’t have the ability to manipulate the spread; the platform can only display what the banks are passing through.
COESfx charges a transaction fee, rather than taking the spread, as most platforms do. The fees charged vary, based on volume. In 2005, customers were charged, at most, $10 per $100,000 traded—but Weiner says the firm plans to cut that to $7.50 early this year.
New customers can open an account with $5,000, then use leverage, comparable to trading on margin, to trade 50 times that amount. Weiner says that 50-to-1 leveraging is relatively low in the currency-trading industry. He has seen 400-to-1 leveraging (investing with borrowed money), but believes that can kill the beginning trader. “We recommend that when you start out, you use at most 5- or 10-to-1 leverage. The less leverage you use, the less exposure you have.” There are no additional fees for using leverage.
COESfx has set up risk-management tools so that nobody will have a margin call where they have to come up with additional funds. Weiner says that when a customer has a loss of 80% of their starting daily volume, they get stopped out. With $10,000 they can buy $500,000 of currency but their exposure is only $8,000.
You can sign up for a demo account, which displays trading through just one of the banks available. But depending on the currency pair, you’ll still see a good depth of market with the one bank. The platform is Java-based and, similar to direct-access brokers, must be downloaded and installed on your computer. A high-speed Internet connection is most helpful both with the download and with running the platform once it’s installed. (But if you’re still using dial-up, you probably shouldn’t be trading online.)
There are other ways to get in touch with your inner Warren Buffett. The first currency exchange-traded fund—the Euro Currency Trust (ticker: FXE), which tracks the euro’s exchange rate against the dollar—began trading last month. In addition, EverBank (http://www.everbank.com) offers money-market accounts and certificates of deposit denominated in an array of currencies (including the Icelandic krona, which yields over 8%) and gold.
FIDELITY (http://www.fidelity.com) has updated its Wealth-Lab Pro tool, which is available to customers who qualify for Active Trader services (120 trades per year). Wealth-Lab allows traders to design, build, back-test, and execute customized-trading strategies.
The main pieces of this upgrade are a new user interface and a “wizard” that helps the user build a trading system. Also new is the ability to plug both fundamental corporate data and technical indicators into a model, which is unique as of this writing. (TradeStation plans to add fundamental data to its trading systems in its next release, due out in the spring.)
There are several steps to building a trading model. First, you define the stocks you will be examining by setting up a watch list. You can create numerous lists, and mix and match them as necessary. Then, you define the specifics of the model, which can include both fundamental and technical data, plus your entry and exit points. The wizard then generates the code to run the model; if you want, you can manually modify the code.
Once the model is built, you run it on historical data to see how it works. Wealth-Lab Pro builds tables of results, letting you compare the model’s performance to a simple buy-and-hold strategy, as well as utilizing margin. One key enhancement to this version is that you can tell the model to only buy and sell in round lots—the prior version might have told you to buy 362 shares of a stock at one entry, then sell 278 at the next exit.
If you qualify for active-trader status at Fidelity, Wealth-Lab Pro is a terrific tool to use to build and test trading strategies. The truly brave can let it automatically execute trades as well.
