The Nasdaq's plunge has taken with it dreams of Internet riches. "You realize how much you didn't know," said one investor.
Throughout the stock market boom of the past several years, the airwaves were flooded with ads promoting the trading of stocks over the Internet as the fast route to easy riches. They depicted a world where tow-truck drivers owned their own islands, teenagers had helicopters and nobody needed a stockbroker's advice any more.
Then the market for technology stocks crashed, dragging the Nasdaq market down more than 60 percent in the past year. Pained and confused by that stunning reversal of paper fortunes, investors are searching for financial guidance. Increasingly, they are turning to the traditional brokerage firms that the Internet was supposed to make obsolete.
The heyday of the do-it-yourself investor is over. As their customers pull back from the market, the firms that specialized in offering fast and cheap stock trades are scrambling to recast themselves as trustworthy advisers before their customers seek refuge in the arms of conventional stockbrokers.
The advent of electronic trading was supposed to spell doom for those old-fashioned brokers, who were seen as overpaid peddlers of their firms' initial public offerings, mutual funds and other products. Instead, it gradually forced them to change their ways by lowering prices, reducing their emphasis on generating trading commissions and even offering their own online-trading services.
Now, by many accounts, the tide is turning on Wall Street as investors lose faith in their ability to manage their finances with one hand on a computer mouse. Trading activity has dropped sharply this year at low-price electronic brokerage firms such as Etrade Group and Ameritrade Holdings.
Investors, meanwhile, are buying more mutual funds through brokers than on their own, and traditional brokerage firms say they are attracting more cyberspace exiles every day.
"We found a lot of do-it-yourselfers coming in," said Larry Silver, marketing chief of Raymond James Financial in St. Petersburg. "Ten or 12 months ago, they started trickling in. Today, it's a tidal surge.
"They tell us, "We've lost our money. What can you do?' "
Among the converts are confident, technology-savvy investors such as Donald Williams, a 30-year-old software company executive in North Carolina. For the first few years, Williams said, trading stocks over the Internet was fun, "really a form of entertainment." But as the stocks in Williams' online trading accounts headed toward a 45 percent drop last year, and the sale of the company he co-founded gave him even more to invest, he called a Merrill Lynch broker to ask for help.
The electronic brokers tried to persuade investors to stick with them no matter how large their accounts. But Williams decided to do what affluent investors had been doing for decades: He hired somebody to manage his money. "I didn't want to make any mistakes with the bulk of my assets," Williams said.
On the advice of a pair of Merrill brokers, Williams, vice president of operations for Dataflux in Cary, N.C., has sold some of the technology stocks he had bought online, hedged his positions in some others by selling options to limit his potential losses and put most of his money into mutual funds. It is still an aggressive approach, he said, but one better tailored for his needs and goals.
"It's not that I disliked brokers, but I didn't want to pay somebody extra if I didn't have to," he said. "When you learn a little bit, you realize how much you didn't know."
After a few years of steadily losing customers and their money to firms that offered online trading, Merrill Lynch is now luring investors away from those firms by offering personal advice on everything from stocks and bonds to taxes and estate planning, said James P. Gorman, an executive vice president in Merrill's brokerage operation.
"Losing serious money is a major life event," he said. "As the bubble has burst, people have realized investing is not a game."
He declined to share Merrill's new account data in detail, but he said the flow of customers "has been inexorably getting better" for more than a year. In conversations with some of the firm's 14,000 brokers, Gorman said, "The flow of anecdotes is clearly indicating a flight to advice."
Merrill Lynch, the nation's largest brokerage firm, is catching up, though not yet even, with Charles Schwab, the largest online brokerage, in attracting new money. In the fourth quarter of last year, investors poured more than $26-billion of new money into accounts at Merrill Lynch, according to Richard Strauss, an analyst at Goldman, Sachs. That was less than the $31.5-billion that flowed into accounts at Schwab, Strauss said, but it represented a sharp change from the second quarter of 1999 when Schwab took in more than three times what Merrill did.
The trend has been strong enough for Merrill to buck the discounting era that the Internet ushered in and raise prices. Fees on Merrill's primary brokerage account are going from about 1 percent of a customer's investments annually to about 1.5 percent.
"Clearly, they're enjoying the fact that people are willing to not only give them their money but pay more for advice," Strauss said. "There is a lot of anecdotal evidence that customers are pretty disillusioned at their ability to pick stocks. The advice-based platforms are coming back, big time."
The trend has given firms such as Edward Jones Investments, which doesn't offer clients Internet trading along with traditional brokerage services, a chance to gloat.
"Over the last two or three years, it got so easy to make money that people forgot the true value of professional advice," said Kenny Locke, an Edward Jones broker in St. Petersburg. "There's a realization that they got too aggressive and tended to buy (stocks based on) last year's returns."
In the meantime, the pure electronic brokerage companies, those without branches, are suffering. So far this year, their trading activity is down from 10 percent to more than 20 percent and account growth has slowed sharply, even though most of the firms are still advertising heavily and offering free trades to new customers.
Once high fliers, the stocks of electronic brokers have crashed along with the Nasdaq. Shares of Etrade and Ameritrade are down about 75 percent from their highs a year ago. Thursday, a Schwab spokesman said the company is "uncomfortable with the current consensus for the first fiscal quarter" of 13 cents a share. And Ameritrade, the Omaha,Neb., company that was the prototypical anti-establishment brokerage firm, turned to Wall Street to find its next chief executive, a senior Merrill Lynch executive, Joseph Moglia.
Moglia acknowledged that Merrill was now taking business away from electronic brokers but said investors would return to trading online when the market rebounds. "When things are not going particularly well, it's natural for individuals to be able to reach out and say they need help," he said. "We're going to go through cycles where clients will lean more in one direction or another."
_ Times staff writer Steve Huettel contributed to this report.