The internet is obviously changing the way retail investors do business. Parallel to the growth of online brokers is a massive expansion of direct investment by baby boomers now thinking about retirement. As a result, a rapidly increasing proportion of direct equity retail holdings is traded online. But have investor relations departments changed the way they address their retail holders?
One award-winning IRO for a major company with a large retail holding engagingly confesses, ‘Off the record, I could sell more stock in one lunch meeting with an institution than these individuals could buy in year. It’s a question of the resources I can devote. We do more than a lot of companies – we go to NAIC fairs, we answer individual e-mails, and we have an easily navigable web site – but we have to try to do it in a low cost way.’
However, he admits that with the one-click-launches-a-thousand-e-mails technology, the cost impediment to retail investor relations is fast disappearing. Many investor relations officers have had a nagging worry about the growth of online trading. At one time retail holders were loyal stock huggers: they could be counted on as ballast to counter the swooshes of liquidity from momentum players and the like and to stick with management – through apathy if nothing else – in a hostile takeover.
Recently, however, many investor relations professionals have wondered whether the proverbial mom-&-pop investors have stopped taking their RitalinT, as opportunities for net-trading drive them into hyperactivity.
Several recent studies suggest that such fears are ill-founded. A Roper Starch survey commissioned by Ameritrade at the end of last year indicates that a rapidly growing proportion of individual holders are indeed clicking their picks instead of phoning a broker. However, it also showed that they were looking long and hard at stocks before making investment decisions; and that having made them, they still demonstrated all the loveable traits of loyalty and trading inactivity that investor relations officers love and respect.
However, that does not necessarily mean that IROs should return complacently to the old days of lunching the institutions and leaving individual investors to glean what comfort they can from chat rooms and online analysts. The technology that allows investors to trade online also offers unparalleled opportunities for companies to approach small individual investors directly.
SEC warnings
Failure to take up those opportunities could bring down the wrath of the SEC. The commission has already delivered serious warnings to companies that they should treat individuals and institutions equally. In the past, expediency and ease may have justified preferential distribution of information. But when almost every investor is merely a click away, there are no good excuses for ignoring anyone, not least when online traders could conceivably react as precipitately as other traders to the news they see on their screens.
The SEC has been earnestly talking of a level playing field for information and is tracking the changing investment scene. Commissioner Laura Unger’s report, Online Brokerage: Keeping Apace of Cyberspace, published last year, estimated that in 1998 $415 bn in brokerage assets were held online; that the level would grow seven-fold to $3 trillion by 2003.
She identifies the major problems as equitable access to information and the ‘suitability doctrine’ for online brokers – their obligation to recommend only suitable investment recommendations to customers. ‘As data mining technology enables online firms to customize information and provide it to customers, this question becomes even more pressing.’
Her report also poses the following question: ‘How do firms protect the privacy of their online customers’ personal information? As online firms’ data mining capabilities develop and the number of financial conglomerates continues to grow, so do customers’ concerns about what these institutions can and will do with their personal information.’
However, it may be that the regulatory requirement to disseminate information contradicts privacy protection. Indeed, when asked about it, Unger admits that at present the technology and the regulations are ‘at a crossroads.’
She is well aware of the questions, but sensibly wary of providing answers. ‘You have this mechanism for distributing endless amounts of information to investors, to individuals, so what do you do with it? How do companies use the internet to market themselves? How do they respond to rumors in chat rooms, and how do they use the internet for better IR? It obviously provides ways for the company to find what investors are interested in and to provide information that would not be included in the SEC filings.’
So concerned is the SEC that it is working on its study of the behavior of online investors. Unger concedes that this is beyond the traditional scope of the SEC, ‘But we need to know how they behave so we can estimate the resources and regulation needed for them to make their decisions,’ she says. ‘Although they are more stable, there are issues to be faced such as commissions if they trade more frequently and begin churning their portfolios.’
Opening up IPOs
One aspect that the SEC is not looking at currently but may do if it reacts to popular concerns among retail holders, is the question of access to the first fruits of IPO gains. Bill Hambrecht set up his new merchant bank to boldly go where the SEC has not gone yet. Mike Ackrell, head of banking at WR Hambrecht, unequivocally declares, ‘We’re trying to open up IPOs. We don’t mind if it’s institutional or retail, but we want equal opportunities.’
Ackrell cites the recent example of the Andover launch, where the retail and institutional sides ended up with half each. Indeed, he suggests this is more open even than the figures suggest, since his experience with traditional IPOs is that 50-60 institutions usually walk away with almost everything. In other words, even the small and medium institutions are left out, never mind the retail sector.
However, the benefits are not just for the retail investors who get a piece of the deal. According to Ackrell, they also include larger distribution, better pricing and more loyal holders. ‘Hambrecht’s online Dutch auction system not only leaves the client company with more capital, it helps make targeting and tracking easier,’ he says. Ackrell maintains that overall, companies benefit by having more parties interested in their stories. ‘Studies show that the affinity holders – people who buy products and services from the company they hold stock in – are long-term holders as well as good customers.’
For example, he says, ‘With Andover, the open source software community wanted to join in. So we were trying to help the company make the IPO a good branding opportunity with a marketing strategy to get publicity and get the word out to the people who are using their services, as opposed to just going to the institutions.’
WR Hambrecht’s approach is supposed to avoid a dramatic price rise at the launch of an IPO, which would seem to put capital in the pockets of institutions instead of the new companies. Some start-ups argue that this is less bad deal pricing, more an investment in marketing and a boost to their brand. Ackrell remains unconvinced, however. ‘The impact of high rises is diminishing, and if you leave $100 mn on the table, then just think of how many Superbowl ads or billboards you could get for that amount.’
As it was, Andover did shoot up on the day of its IPO. However, Ackrell points out, ‘Lots of those people who bought at $50-60 a share in the aftermarket could have been in at the beginning at $18. But as we get our name out and get more partners, and the sheer mechanics of dealing with such a large retail base are improved, it will get better. There are lots of issues still to address, and the SEC is looking at procedural issues, but most people appreciate what we are trying to do.’
Internet-attuned Hambrecht itself has a direct link to company web pages, and investors can tap into its system where they can get the S1 and other filings. ‘We do postal mailing and we do e-mailings; we just try to get out there with direct marketing,’ Ackrell says. Hambrecht offers its clients a list of investors, which because of their relative stickiness is more up-to-date than most IPOs could provide. It contains the names, addresses and phone numbers of the holders, which the investment bank advises the company to build a database from.
Even though it does not currently contain e-mail addresses, it might in the future. For now there are problems with co-managers who are understandably reluctant to pass on what are effectively their client lists.
Expanding disclosure
The most dramatic example on online openness to retail investors, helped along by SEC strictures, has of course been the opening of conference calls to all investors on the internet. Texaco’s IRO Liz Smith not only does that, but at the beginning of this year she contracted for the software, ‘the push technology,’ which would vastly expand her own lovingly handcrafted investor e-mail list.
The new software would allow the individual to register at the site, and would then get an e-mail alerting them to new postings and releases. A growing resistance to ‘spamming’, or junk e-mail, prevents a more aggressive push approach. ‘The reality is that people do not want to receive unsolicited e-mail – there’s a privacy issue,’ Smith cautions. However, around 30-40 percent of Texaco stockholders are on the company’s direct reinvestment plan, which provides an immediate database of retail investors to solicit.
The situation is changing at web-warp speed daily. It has to be said that for government employees, the SEC is only marginally behind the wave front of new technology. ‘We’re at a crossroads,’ Laura Unger admits. ‘The internet provides a way to democratize information. On the other hand it’s not such an accepted medium of distributing information, so you may run into the selective disclosure issue. E-mail without snail mail may amount to selective disclosure. So we are saying that we want information out there, but we are also saying that unless you also provide that information through a press release, a news conference or some other traditional means, then you may potentially incur liability.’
On current form, within a year the majority of retail holders will probably be online. Wouldn’t that make internet investor relations the norm? Frankly, Unger counters, ‘Do we take a poll? Until we fully make the transition from a regulatory point of view, the issuers and brokers are going to be stuck in the middle, having this wonderful technology, but still stuck in the rules of the paper world – I hope it will be quick.’
Perplexed IROs would probably agree, as they try to look ahead while looking over their shoulders at the regulatory issues.
