ING Direct Enters Low Cost Investing

18 Dec

ShareBuilder LogoWith an email announcement sent to ING Direct customers last night, the integration of ING Direct and ShareBuilder is official:

I’m pleased to announce that ShareBuilder, America’s most innovative online brokerage, is now part of ING DIRECT.

… ShareBuilder was created by its pioneering founders to make it simple and affordable for regular folks to invest in the stock market.  Thanks to ShareBuilder, investors big and small can now invest, big time.

The deal, which was first announced in November, introduces an interesting new element into the world of low cost brokerages.

Earlier this year, BusinessWeek covered several new players in the world of low cost equity investment, including the likes of TradeKing, Zecco, and ThinkorSwim, who use a powerful combination of social networking and low cost trading to target first time investors. First time investors value the social element because it helps them make sense of the world of investing through easy to follow blogs, forums, and FAQs. Users answer one another’s questions, reducing the need to hire an army of support staff to help them.

Yet first time investors are also the target audience for ShareBuilder, which earned rave reviews in Forbes “Best of the Web” for its investor starter packages that included an investment guide, investment certificate, and a copy of the Wall Street Journal Guide to Understanding Personal Finance; distinctly “old-school” approaches to targeting this same audience. Its online guides to investing in ETFs are similarly praised by Forbes, and 40% of their users invest in them.

So the question comes to my mind: why did ING pick ShareBuilder? From the little I know of the company, here is some common-sense speculation:

  • Acquire a well-established (ShareBuilder has been around since 1996) with a good reputation and track record
  • Acquire new customers for ShareBuilder, and use the existing base of ING Direct users to add new users to ShareBuilder
  • Acquire a company with a similar target customer to ING Direct: the financially inexperienced
  • Extend ING Direct’s product offering of simple investment offerings to include equity investments and ETFs

How can we analyze those criteria to understand the prospects for these new social investment sites to be acquired?  The first two bullets don’t currently play well, as both are still young and have relatively small pools of users, but that could change with time.  The third and fourth fit quite well, assuming there are some other big fish like ING Direct looking to get into the world of equity investments.

But it is the choice of ShareBuilder and its technology approach which has me thinking this morning. It seems to be part of the “old guard” of web investment (forgive the expression: web investing 1.0), lacking any significant social elements that the new players are using as their main differentiator. But which is the better approach to addressing the needs of new investors? Easy to use, self-service FAQs and free investment books, or forums and user-generated content?

Since obviously the answer to that will depend on the particular user, and their need and desire to interaction and personal advice, I suppose the question really becomes: how big is the pool of new investors who prefer “traditional” help tools, as compared to “social” tools? Are there enough new users comfortable with social networking to slowly erode share from eTrade, ShareBuilder, and the like?

An emerging generation of young professionals who spent their college careers on social networking sites would seem to bode well for Zecco and TradeKing, but it would be interesting to see an analysis: for every 100 new investors joining a brokerage online today, how many go to each?  And what can the new players do to increase those figures to their advantage?

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