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The Merger Trend in Discount Broker Industry

A general trend of mergers has been observed in the discount broker industry, which has affected the position of many brokers. As the grave statistics concerning the fourth quarter of 2005 shows, mergers have affected approximately half a trillion dollars worth of assets and nearly three million accounts. Some of the major mergers that took place during this period were the ones between Ameritrade and TD Waterhouse, which gave as a result TD Ameritrade, and the acquisition of Harrisdirect and BrownCo by E*Trade.

The result of the transference of accounts from one brokerage to another has resulted in poor service and the emergence of innovative trading tools. Additionally, investors had to deal with new commission structures, which further complicated the situation.

A research has shown that in the previous year the satisfaction with online brokers has slightly increased. But, as a result of the many mergers and acquisitions that have occurred in the industry a decrease in the satisfaction of customers has been observed since they were required to switch between the newly set brokerages. Brokers also suffered a lower satisfaction score according to the same study.

Benefits from the Mergers

The merger and acquisition trend has not equally affected all brokerages involved. For example, Fidelity and Schwab, which hold approximately 80% of the cash in discount brokers, were not affected since neither of them was involved in whatsoever merger or acquisition. It has been argued that before the Harrisdirect merger, the latter's performance enjoyed higher levels, whereas E*Trade's acquisitions were not of a great importance since the company's investors generally didn't needed any assistance. The customers of BrownCo have even benefit from the acquisition by E*Trade since they are now provided with the opportunity of trading bonds online. 

Additionally, the consequences of the Ameritrade merger were not that bad since the newly set company now provides its investors with lower commission fees. What is more, the customers of TD Ameritrade are now able to benefit from a more practical website, since they can use new investment tools that are provided by Ameritrade's platform.

Grave Predictions

Some financial experts predict the existence of only three discount brokerages after the current round of consolidations.

The Effect on Customers

The important thing to remember is not to let the mergers make the choice of which brokerage firm you are going to use instead of you. Do the necessary study before transferring your money.

A study has been made on the brokerage firms that have survived the round of consolidations. The researchers took the following steps in order to provide for the realistic results of the study:

  1. The researchers opened accounts with 14 brokers.
  2. They purchased and sold corporate bonds, little and big stocks, and covered calls.
  3. They executed numerous calls to the customer-service centers to check the responsiveness and overall customer service levels of the companies involved in the research.
  4. Discovered the companies which charge their clients high transaction fees for out-of-network funds, in order to check the expenses surrounding the trade of mutual funds.
  5. They thoroughly read through more than 1100 tax forms to check for the adequacy and thoroughness of the information provided.
  6. The researchers verified the readability of account statements.
  7. An evaluation of the brokerage companies' web sites was made for the purposes of determining their ease of use and navigability.
  8. A cash rate was included so that the can choose among the best rates. Another option is the transference to money market funds that give high yields.

The following chart provides the results of the study, but keep in mind that the company on the first position is not suitable for day traders or investors heavily concentrating on mutual fund investment.

  1. Fidelity
  2. E*Trade
  3. Charles Schwab
  4. Bank of America
  5. TD Ameritrade
  6. Wells Trade
  7. Vanguard

So, it is up to you to decide on the brokerage firm you are about to use if you are one of those investors affected by the consolidation trend.

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