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SEC takes issue with online brokers

Evening Standard
17 May 1999, 12:00am

America's regulators are in a lather about advertising and the target isn't tobacco or alcohol - it is online stockbrokers. The Securities and Exchange Commission is threatening to regulate advertising for the rapidly-growing online investment community if it does not stop showing adverts that make it look as though all you have to do is open an online brokerage account and watch a fortune roll in.

Attracted by low trading costs, push-button dealing, free stock quotes and access to company research, more than four million US investors now trade online and account for 20% of daily activity on American stock markets. Analysts estimate that by 2002 some 20 million investors will trade online and the competition to handle Internet trades is intense. Online brokers spent $100 million (£62 million) advertising their services last year, a figure that will double this year, according to surveys.

Rags-to-riches is a common theme in adverts for online brokers, where the risks are glossed over and rewards emphasised. One award-winning advert for Discover Brokerage, part of Morgan Stanley Dean Witter, features a tow-truck driver telling a businessman he is rescuing that he made a fortune in the stock market but drives the truck because he likes helping people.

"That's my home," says the truck driver pointing to a postcard of an island paradise clipped to the dashboard. "Looks like an island," says the stunned executive. "Technically, it's a country," says the portly truck driver.

SEC chairman Arthur Levitt cited that commercial and others in a recent broadside against online brokerage advertising, which he compared with commercials for lotteries because they make winning look easy.

"Selling securities is not like selling soap," says Levitt. "Brokers have always had a duty to their customers beyond simply 'buyer beware'."

In one TV commercial, E-Trade, the largest independent online broker, makes the direct link between gambling and stock market trading advising viewers to forget waiting to win the lottery and start trading online.

Online brokerages routinely flout conventional wisdom on selling financial services. Traditionally, TV adverts for mainline brokerages focus on their ability to manage money against risk and provide a safe place to invest for the future.

Smith Barney's famous credo: "We make money the old-fashioned way, we earn it," is an anachronism in the online investing world which focuses on acquiring riches, not protecting assets and minimising risk. One advert for Ameritrade particularly bothered regulators because it had two mothers comparing the stellar record of one mum's online stock trades with the lowly return on the other's mutual fund, similar to a unit trust.

"Has it become passé to invest for the longer term and diversify your risk?" asked Levitt.

He has called for regulators, advertisers and online brokers to discuss possible guidelines for the industry. Some critics have suggested disclaimers on adverts, like those used on cigarettes and alcohol, warning the user of the risks involved.

Supporters say consumers understand they are not going to get rich simply by making trades through an online broker.

Levitt does not agree. "When firms tell investors again and again that online investing can make them rich, it creates unrealistic expectations," he says. "In an environment where many investors are susceptible to quixotic euphoria, these commercials...border on irresponsibility."