We each have our own views of the benefits and costs of traditional and online sales channels for buying and selling financial products. But these personal perceptions have enormous business implications for the firms selling financial products through the Internet.
If you want to buy and sell stocks, bonds, or shares in mutual funds, what are your channel options? You can contact a broker or financial planner either face-to-face or by telephonean option known as the traditional sales agent channel. In the past few years, investors have also had another channel optionthe online, or Internet, channelfor getting financial news and information and buying and selling through such online brokerage firms as Ameritrade and E*Trade.
While there is little argument that the presence of the online channel has affected the customer policies of traditional financial service firms, our study took a consumer perspective, examining individual consumer perceptions of the two channels. We designed the study to gain a better understanding of these perceptions of the relative benefits and costs of each channel. We ultimately identified a set of relevant cost and benefit perceptions with the help of an integrative methodology, including secondary research (a review of the academic and practitioner literature) and direct consumer interviews.
Individual investors worldwide appear to be most concerned about convenience, control, ease of use, return potential, financial education, the costs of transactions, and risk management. Moreover, individual investors apparently take a long-term view of their relationships with channel intermediaries [6, 10, 12]. Hence relationship features, including the trustworthiness of the channel (members), assume importance in their relative evaluations.
We focused on three questions. First, how do individual investors view each of the two channels on each cost/benefit criterion? Previous literature  suggested that more favorable perceptions of a channel may contribute to stronger preference for it relative to the other channel. Second, recognizing that channel perceptions are formed in part on the basis of consumers' use of the channel, do users of the online channel perceive that channel to be better than the traditional channel? For the study, when we say "user" we mean individuals who have bought and sold any of three financial productsstocks, bonds, or mutual fundsthrough the online channel. Third, do nonusers have more favorable perceptions of the traditional channel as compared to their user counterparts? The answer to the second and third questions likely have communication implications for the online firms that target nonusers as part of their customer-acquisition strategies.
The Internet has produced significant changes in how financial products are bought and sold worldwide and consequently in the role and importance of traditional intermediaries, including agents and stockbrokers. Not surprisingly, experts have noted that removing intermediaries is great for the financial service industry . The online channel has also meant greater leverage for investors as they not only take part of their portfolios online and "play with it" , they also ask for and use advice from brokers in managing their online investments. The stock market situation since the downturn in stock prices the past few years has made investors more risk averse and less confident in their personal ability to self-manage their portfolios . Meanwhile, the potential competition from the online channel has increased traditional intermediaries' awareness that their long-term performance depends on providing superior value to customers.
Financial service managers therefore need to improve their understanding of how consumers perceive the online channel vis-à-vis the traditional channel. Our own exploratory research suggested that individual investors use a number of perceptual dimensions in evaluating the two channels, the most fundamental involving cost, return, and risk. Even before the advent of the online channel, investors viewed cost as an important feature when deciding whether to stay with their current brokerage or switch to another brokerage. For example, in response to a 2001 Harris Interactive survey asking customers which improvements would cause them to consider switching brokerage firms, 47% of the respondents cited lower commissions . Other improvements cited included not incurring extra costs for stop/limit orders (35%). The same survey found that the relatively affluent are even more likely than the overall market to say that lower commissions would likely cause them to consider switching to another brokerage.
The online channel gives investors the opportunity to significantly reduce the cost of conducting their personal financial transactions. For instance, a stock trade might cost $8 to $30 through the online channel, while the same trade might cost from $75 to $150 with a traditional broker. Offsetting the higher cost, however, is the fact that investors who have used intermediaries (such as brokers) report good returns over the past 20 years . Investors may attribute them, at least partially, to the investment skills of the intermediaries but also to generally good times and luck. Not known, however, is whether investors feel they can do better (on returns) and are better able to achieve their financial goals (compared to intermediaries) by managing their own finances. Moreover, given that both the overall financial-service market and individual stocks experience up and down cycles, investors know that some risk is associated with their investment returns. Not generally known are consumer perceptions of risk involving the two channels. Because intermediaries have more information than individual investors , investors may feel that using the traditional channel could help reduce the variability of their portfolios' returns.
Investors also value convenience when conducting financial transactions. The online channel allows them to conduct transactions anywhere at any time. In the traditional channel, agents may not be available precisely when investors need specific information. Over time, investors may also want to know more about financial markets and instruments so they can make more-informed investment decisions. Some progressive financial institutions have in fact sought to derive competitive advantage by using investor education as a differential selling point. Investors may also want to assume greater responsibility for their financial well-being by self-managing their investments. While they may not take 100% control, some are likely to evaluate the possibility of managing some of it without an agent's help.
Finally, trust is an important component of any relationship involving money. Trust implies that investors feel an agent will not use their limited knowledge to the agent's advantage. Investors are vulnerable since agents have more timely and accurate information compared to them. When agents engage in self-interest-seeking behavior by, say, churning an account to increase commission fees, the investor's interests are sacrificed. When trust is violated, relationships suffer, and investors may feel it's time to look for other channel alternatives. Whether they actually switch channels depends on such features as their personal knowledge and confidence levels, time pressure, and risk aversion.
Dissonance theory  suggests users would give higher ratings to the channel they use than to the channel they don't use. The implication for our study is that investors who use a certain channelonline or traditionalare more likely to have a more favorable attitude toward that channel relative to the other channel.
Sample Description and Findings
We defined the target population for the study as educated, upscale professionals in the state of Iowa. We generated a sample of 430 target participants from a professional mailing list vendor. We then prepared a survey instrument, including scale items for measuring the study's constructs, and mailed it to these sample members. Of the surveys distributed, 112 were returned, or a response rate of 26%. The demographic profile of the sample included 67% men and 33% women. Of the respondents, 77.4% were between the ages of 25 and 54, the vast majority with college educations. Moreover, 70.9% had annual incomes over $50,000 and 22.7% over $100,000. We defined users as individuals who had bought or sold stocks, bonds, or mutual funds online in the three years prior to the time of the survey.
The survey instrument asked them to indicate their relative perceptions of the traditional channel vis-à-vis the online channel in meeting their financial requirements using a seven-point Likert scale. We found that investors' channel requirements include: lower-cost transactions, increased rate of return, improved management of risk level, easier-to-execute transactions, convenience, control, financial education, ability to achieve financial goals, access to information, and trustworthiness. The survey asked whether the traditional channel is likely to be better than the online channel on 10 channel features (all listed). The midpoint of the scale (4) represented a neutral value where both channels were perceived as equal. We conducted a statistical test to determine whether the scale value for each feature was significantly different from the neutral value (see Table 1).
The online channel was perceived by the survey respondents as better than the traditional channel on four of the 10 features: reduced cost of transactions, convenience, greater personal control, and easier-to-execute transactions. For the other six features, we found no differences between the online and traditional channels. Overall, these findings agree with prior research on the common benefits of using an online channel: transaction cost reduction, convenience, control, and ease of use [2, 4].
Online channel user perceptions of channel benefits. Segmenting the respondents based on use allowed us to weigh how the online channel affects perceived benefits and costs; the results for the online channel user group are listed in Table 2. Users of the online channel view that channel as better than the traditional channel on five features: lower-cost transactions; ease of conducting transactions; convenience; an opportunity for control; and greater return. For the other five features, we found no perceived differences between the online and the traditional channels.
Online channel user perceptions differ from the overall sample on only one feature. Online users feel that the online channel will yield a greater return compared to the traditional channel. However, it should be noted that online investors do not perform as well as investors who rely on financial intermediaries. A 1999 study of online investors found that the returns they achieve are about two percentage points lower than the returns of investors using the traditional channel . It is possible that increased perceptions of control offered by the online channel may also make online investors feel they can achieve a better return.
User vs. nonuser perceptions. Do nonusers differ from users in their relative evaluation of the two channels on the 10 features? We explicitly compared user and nonuser perceptions of the two channels (see Table 3). For most features, nonusers viewed the traditional channel as better than the online channel. Two features showed no differential evaluation: "managing risk level" and "access to information." We were surprised to find that investors view the sales-agent channel as equally risky as the direct channel. Part of the problem for these investors may be that agents and brokers have never sought to calm investors' risk perceptions by giving them information of value. It is also possible that investors view market risk as a given that cannot be managed, even through intermediaries.
Another interesting finding is that nonusers do not provide high scores for the traditional channel when it comes to control, convenience, and cost, giving these features scores below the neutral point of four on the seven-point scale. They do, however, rate the traditional channel better than the online channel on these features. To some extent, this result can be attributed to dissonance reduction, that is, respondents wanting to find reasons to support their own channel choices.
Implications for Financial Service Managers
The differing perceptions by consumers regarding the benefits of traditional and online channels for buying and selling financial products have a number of strategic and tactical business implications for both individual investors and financial service firms.
First, we found that the online channel is perceived as better on cost, convenience, and individual investor control. This finding reinforces the market-entry strategy adopted by online brokers Ameritrade and E*Trade. For example, Ameritrade's advertising spots from 1998 to 2000 focused on ordinary investors paying $8 per stock trade and taking charge of their own financial affairs. Traditional brokers responded by pointing out that the control offered by the online channel can bring about financial harm to investors, as market moves are best handled by professional money managers.
Second, although the traditional channel is not perceived as better than the online channel on any feature by the overall sample in the survey, nonusers of the online channel view the traditional channel as better on eight of the 10 features. This positive finding for traditional channel providers suggests that firms using this channel should try to deliver additional customer value to slow consumer adoption of the online channel. Ways to add value include more timely access to financial information, investment education, management of risk, and better return.
Finally, sample respondents reporting their adoption of the online channel for buying and selling financial securities had crossed the 40% mark, suggesting that investable resources had shifted quickly from the traditional channel to the online channel. As consumers take greater responsibility for their own financial affairs, the online channel can be expected to account for an even greater proportion of their total personal investments.
The overall finding of our 20012002 study is that the online channel could continue to grow as a medium for personal financial management and investment because individual investors feel it provides benefits not available through the traditional agent/broker channel. However, the online channel is not expected to ever completely replace the traditional channel, because some investors still appreciate, and are willing to pay for, face-to-face personal service available only through the traditional channel. Please also note that the implications we have drawn are based on only a single study. The generalizability of the study's findings could be reinforced by replications using other samples and geographical regions.
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