Don't Discount the Discounters

Don't let the financial services sting keep you away from checking out the key discount brokerage players. Quarterly reports out of E*Trade (Nasdaq: ETFC) and TD AMERITRADE (Nasdaq: AMTD) yesterday show that all is well on the trading front.

TD AMERITRADE saw its profits soar 35% to $0.31 a share, and scored $7 billion in net new assets during the period. E*Trade posted a loss, but tacked on 62,000 net new accounts during the quarter.

In other words, the industry is growing, even as its full-service rivals are stung by investment banking weakness and asset-chomping write-offs.

You could have slept through Thursday and still caught on to that. Charles Schwab (Nasdaq: SCHW) set the tone with a positive quarterly report on Tuesday. You can also go back three months to find all three of the leading discount brokers heading in the right direction with their previous reports.

So where do we go from here? That is up to Mr. Market. Volatility is a broker's friend in the near term, but churn can turn into tumbleweed if a pronounced bear market dries up demand for equities.

The precipitous dip in short-term rates may help the industry. Even if discounters like E*Trade and Schwab can't promote the 5% money market yields they were once paying out, they are still offering 3% yields that are several times the industry average. Yield-chasing savers in traditional banks with pitiful payouts may wash up on discounters' shores.

Ultimately, buying into discount brokers is about agreeing to the thesis that more people will want to take control of their financial futures, with saving a little pocket change in commissions as a welcome bonus.

That speaks well for the big three discounters, as well as companies like INVESTools (Nasdaq: SWIM), TheStreet.com (Nasdaq: TSCM), and Morningstar (Nasdaq: MORN) that lend a hand in the due diligence process.

So keep it up, discounters. Even the E*Trade baby is drooling over the potential.

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