The Virtual Brokerage

Russ Wiles is a mutual fund columnist for The Times

When there's change taking place in the discount brokerage business, Jack White often is leading it. White founded the West Coast's first discount brokerage in 1973, and his Jack White & Co. later became the first such company to allow its customers to trade no-load mutual funds without commissions.

Lately, White has turned his attention to cut-rate stock trading on the Internet and other computer-based innovations.

White, 63, an Ohio native, started his career in the commodities-trading side of the brokerage business after earning a bachelor's degree in agriculture at Ohio State University. He briefly served as president of a now-defunct mutual fund before moving to California in 1968. Jack White & Co. was started five years later, becoming a discount brokerage in 1975 after the Securities and Exchange Commission deregulated brokerage commissions.

White's privately held firm today counts 200,000 customers and $11 billion in client assets. Discount brokerage leader Charles Schwab & Co., by comparison, has $354 billion in customer assets, and No. 2 Fidelity Investments' brokerage arm counts $147 billion in client assets.

Unlike Schwab and Fidelity, Jack White & Co. has chosen not to build a bricks-and-mortar office network nationwide. Instead, it deals with investors, and a growing network of fee-only financial advisors, entirely over the phone or by computer from its lone office in San Diego.

Russ Wiles, a mutual fund columnist for The Times, spoke with Jack White at an investment conference his firm sponsored for fee-only financial planners in late February.

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Times: Your firm has been involved in various innovations over the years, from no-fee trading of mutual funds to marketing of low-cost variable annuities. What's next for the discount brokerage industry?

White: There's a tectonic shift happening now in the brokerage business that involves two distinct yet complementary trends. One is the rise of fee-only financial advisors. The other concerns the electronic interface, or link, between brokerages and investors.

Through their personal computers, investors have unprecedented access to databases offered by the likes of Dow Jones, Reuters and [fund tracker] Morningstar. After they have researched an investment, they can place an order electronically to buy or sell. The brokerage receives, executes and clears the trade electronically, then settles the trade electronically by "sweeping" the transaction against the customer's money market fund, either pulling out cash if the investor is buying or depositing cash if the person is selling.

Eventually, people will be able to settle trades instantly and in any currency, funneling money to or from the depository institution of their choice. This will become very important because it will give people direct access to the global financial markets. For example, you will be able to buy stocks listed on foreign exchanges without the huge brokerage markups.

Times: And the other trend--the rise of fee-only financial planners and other such advisors?

White: Advisors represent a solution to the increasingly complex world in which we live. With electronic interfaces and all of this information, many people want a fee-only advisor for help in making decisions. Knowing intellectually how to pick stocks or mutual funds accounts for only about 40% of the equation for success. The remaining 60% involves having the emotional discipline to follow through on a rigid program.

A lot of people know how to pick investments but don't have the emotional discipline to stay on course. They need someone to keep them on track. More than 50% of our business comes from advisors [investing on behalf of clients], including financial planners and bank-trust departments that want to tie into our menu of no-load mutual funds.

Times: Why should people favor fee-only advisors over traditional full-service brokers?

White: The big advantage of fee-only advisors is that they're sitting on the same side of the table as customers. They have an incentive to see a client's assets grow because their compensation [usually a flat fee or a percentage of the client's assets each year] depends on how well that client does.

Certainly there are many traditional brokers who are good and competent. But if they are compensated by commissions, it creates an inherent conflict of interest for them to recommend load funds rather than no-load funds, for example.

Times: What sort of growth are you seeing on the electronic-trading side of the business?

White: In January 1996, roughly 300,000 people were placing buy and sell orders to their brokerages over the World Wide Web. By January 1997, that tally had increased to 600,000. By January of this year, it had risen to an estimated 3 million people, and we're expecting it will hit 20 million or more by the year 2000.

What's driving this growth has been the accessibility of information and the ease of placing orders whenever you want. Also pushing that growth is the increased desire of retail customers to come to their brokers for traditional banking services.

Times: Such as?

White: We offer free check-writing and the ability to sweep cash to or from a money market fund offering a higher yield than what you can get in bank interest. We offer you the ability to pay your bills electronically or to make deposits electronically.

Times: But a lot of other people like the idea of visiting their corner bank.

White: These clients are disappearing. They're dinosaurs. The new generation of investors is electronically savvy or becoming so. They don't want to have to walk down to the corner.

Times: So you're not concerned that many of your competitors among both brokerages and banks--Schwab, for example--have branches?

White: No. We think brick-and-mortar branches will be liabilities in the new world we're quickly moving into, in the sense that it's very expensive to maintain lots of offices. Banks today recognize that and are charging customers to go inside a branch to talk to a human--they'd rather service customers through an outdoor ATM machine.

The high-cost structure of branches also explains why companies such as Wells Fargo are closing regular branches and [locating] smaller offices inside supermarkets.

Times: But isn't there an element of trust or security that many people may value, of knowing where their broker or banker is physically located?

White: Absolutely. But I think more people are comfortable with the idea of researching their own investments and making trades over the phone or through a computer. Besides, all of our accounts are insured for up to $75 million to protect investors in the case of fraud.

Times: Speaking of technology and innovation, your firm recently began testing an unusual "crossing" system that allows individual investors to trade small stocks for a $5 commission. However, at the moment, this system is only available on 130 Nasdaq stocks of companies based in San Diego. How does this work?

White: This is a way where [once a day] we put customers together on individual stocks [electronically], allowing them to split the bid-asked spread [that is, the dealer markup on a stock].

For example, if a stock trades at a quarter-point [i.e., 25-cents-a-share between the bid and asked prices] spread, we eliminate the spread, saving each party 12.5 cents a share. That adds up to a significant saving of $125 in reduced trading costs on a 1,000-share order. It's a wonderful way for customers to save money. On some bank stocks, for example, you might see a $5-a-share spread.

Times: How's it going?

White: It has been hard to get critical mass, meaning a lot of buyers and sellers coming together. A lot of people don't understand it fully. They're a little suspicious.

It appeals mainly to people who can afford to be patient when buying and selling [because there won't always be someone ready on other side of the transaction for an investor's particular stock]. Also, you can't trade all stocks in this manner; we only have permission from the Securities and Exchange Commission to allow electronic crossing on Nasdaq stocks. It's a longer-term endeavor.

Times: As for the Internet, how do you compete with other brokerages that let investors buy or sell stocks for $10 a trade, or about half what you charge?

White: There are cheaper trades available. But I think most investors want dependable access, and they want to deal with a firm with a track record.

There really are two classes of Internet traders. One is the young person, fresh out of college and with little money, for whom saving every dollar is important. But there's also the more serious investor who's willing to pay $25 a trade because of the range of services we offer and because we are a known entity.

Times: What types of things do you tend to own?

White: I own quite a few mutual funds, for which I'm aiming to earn returns of 12% to 15% a year. For example, I like the concept of index funds and own several of Vanguard's index funds. I also own the Yacktman Fund [a growth fund] and some Fidelity sector funds.

I haven't yet bought any Asian funds, but I think they have become undervalued and will be inclined to shop there. I even have some gold funds such as Lexington Gold because I think the economy will go into another cycle where inflation picks up and the dollar weakens. By the time you see that, it will be too late to buy gold funds. The time to invest is when they're out of favor.

Times: What other investments do you own?

White: Another thing I've done over the years, with considerable success, is watch the people in the local community who have exceptional talent.

I can provide two San Diego-area examples in which I was an original investor and continue to hold shares. One is Qualcomm, a cellular telephone company run by Irwin Jacobs. He was a professor at MIT and UC San Diego who did breakthrough research on de-scrambling cable TV signals back in the '70s.

Another example was Sol Price, who set up the Price Club warehouses, which have since been merged into Costco.

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Russ Wiles can be reached at russ.wiles@pni.com

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PROFILE

What: Jack White & Co.

Headquarters: San Diego

Founder and President: Jack White

Business: Discount brokerage, mutua fund supermarket, online trading

Phone: (800) 233-3411

Internet address: http:///www.jackwhiteco.com

Mutual-fund trading: 6,250 funds available, including 1,250 that may be traded without a transaction charge.

Stock trade commissions: $33 plus 3 cents a share per trade for 2,000 shares or fewer, $33 plus 2 cents a share for more tha 2,000 shares; $25 for shares traded online.

Mutual fund trade commissions: $27 broker-assisted trades executed over the phone; $24 for trades investors do themselves online.

Individual retirement account annual maintenance fees: None with $10,000 balance or above; otherwise, up to $35.

Source: Jack White & Co.

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