According to Paul's numbers, E*Trade must be the stupidest spender in the advertising space, as it receives -- by a wide margin -- the least in new accounts for each ad dollar spent. NDB, to look at but one of the companies mentioned, seems to get more than twice the amount in new accounts for each ad dollar spent than E*Trade gets. For Schwab, the numbers aren't comparable at all.
This should lead one to ask, "How sensible is this gluttonous ad spending that E*Trade is pursuing if E*Trade is attracting the least desirable customers -- and not all that many of those anyway?" Though Paul dismisses the possibility that E*Trade has a short-term mentality, what E*Trade actually seems to acquire are the people who have the least assets and employ the riskiest trading strategies (i.e. over-use of margin).
Though E*Trade has built up an impressive list of supplementary financial services beyond the simple brokerage account, in what way is its array of products distinct from what Schwab, Merrill Lynch, American Express, or a host of national banks offer? Aside from the fact that E*Trade's customers have less money to even use the banking, brokerage, credit card and insurance offerings, there is no real difference. I mean, I'd be impressed if E*Trade were acquiring wealthier individuals with its Roman orgy ad spend, but it simply isn't.
The concept that E*Trade is going to continue getting a nice cut on assets under control is also undercut by the facts. Up to now, E*Trade was simply getting free money on any of the cash in the brokerage accounts, as it wasn't paying any interest. Now, however, with the opening of the E*Trade Bank (which does pay some nice interest rates), those days are over. Again, E*Trade seems to be constantly shaving its margins, needing to offer lower and lower prices and higher and higher interest rates to keep up with the competition.
None of this should be read as really taking shots at E*Trade. The bottom line is that E*Trade is in an outrageously competitive industry where any momentary advantage is quickly mimicked by the competition. In this game, its a lot easier for E*Trade's competitors to hold onto their customers than for E*Trade to take them away. That leaves E*Trade gunning for the newest of the new investors, who ultimately don't have big enough accounts to justify the dollars spent on the acquisition.
This game can last for maybe one, maybe two more years before the huge advertising budget has to dry up. At that point, investors in E*Trade won't be owning much of a growth story anymore, and there isn't any other reason that you'd even entertain valuing this company at a market capitalization of $7 billion.
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