There's no denying that the Internet is transforming technology. It has changed the way that people communicate, work, learn, buy and sell. Just five years ago, only 14% of Americans were online; today, at least half of them are thought to be there, surfing, sending e-mail, booking hotel rooms, applying for jobs, downloading music - and buying and selling stocks. Online trading seemed to be the next logical step in the ongoing democratization and demystification of investing. And, for some investors, online trading promised speed, access, savings - and the end of their dependence on financial advisors.

Trading and the Internet seem to be a perfect fit. The Internet is fast, and buying or selling stocks by phone can seem painfully slow. Online information about the stock market or specific investments is available instantly and around the clock, so there's no waiting around for a return phone call from a financial advisor or for tomorrow morning's newspaper. Online trading also is very empowering for those people who don't have a big enough portfolio to attract advisors or brokerages, or for younger investors who wanted to go it alone anyway.

And, once online brokerages began to compete for the business of online investors with discounted prices and commissions, online trading was a bargain. Add in the fact that the market had been on a steady upswing for years, and online trading seemed a perfect way for amateurs to take over their own finances and, just maybe, outperform financial advisors. That the most promising stocks were high-tech or dotcoms only made the fit that much more seamless. Trading, once the province of professionals, was now open to anyone with a stake and a modem.

By September of 1999, online trading, still growing, already accounted for 37% of all retail trades. Later that year, online trading got a boost when the electronic signature became legal. It seemed that the battle over investing was being won by a new breed that was young, savvy and independent. Cheap trades and no-load funds were the order of the day. For many traditional brokers and advisors, it was only a matter of time before online trading became the norm, and they were looking for work.

The first wave of online traders - young, computer-literate, and mostly male - was driven by the idea that they could do better than most financial advisors, especially because of the speed with which they could get in and out of investments to take advantage of market fluctuations. The ad campaigns of the online brokerages fed their ardor for all things online, as exemplified by E*Trade's "If your broker's so great, how come he still has to work." Then there was Discover Brokerage's online-trading truck driver who had his own island-nation to retire to.

The Wild, Wild West

Online trading, as it turned out, was not all fast fortunes and island hideaways. For one thing, as many people were quick to note, online trading evolved so fast that the SEC had a hard time keeping up, leading to something of a frontier, anything-goes atmosphere. The extensive set of regulations and guidelines that brokers have to abide by were developed prior to the Internet revolution, and the explosion of online trading created a whole new set of regulatory problems and customer complaints.

In fact, since late 1999, online trading complaints have surpassed all other categories of customer complaints filed with the New York Stock Exchange. And in January 2001, the SEC's Office of Compliance Inspections and Examinations issued a report that found that many online brokers still were not adequately informing inexperienced investors about basic investing terms and concepts. The SEC also criticized aggressive advertising that "could lead investors to have unrealistic expectations about the risks and rewards of investing." That explains why the SEC recently announced an online investor survey to help it develop policies and programs for online trading.

Irrational Behavior Online

Even more telling when it came to the risks of online trading was the research that analyzed the track record of individual investors who went online. One study tracking investors who switched from phone-based to online trading found that those who moved online usually had experienced strong performance before doing so, beating the market by more than 2% annually. After going online, they traded more actively, more speculatively, and less profitably than before, lagging the market by more than 3% annually. The authors theorized that the very breadth of information and the power to control their own trading that had attracted investors online was often their undoing.

We conducted our own research to see how individual investors felt about online trading. As expected, Gen-X investors who were computer savvy and advisor-averse were comfortable trading online. But being younger, they also had smaller portfolios. Overall, our research revealed that the more money investors had, the less likely they were to favor online trading. We surveyed nearly 1,500 investors after a "market event" in 2000, a day when the Dow and Nasdaq were particularly volatile. Of those under 35-Gen Xers-just 14.9% had advisors. They had smaller portfolios than older investors, and their holdings were heavily concentrated in tech stocks and dotcoms, with 72.8% having more than half of their assets there.

Perhaps the most significant finding about their take on online trading was how calm they were about market volatility, especially when compared with the older investors who also traded online: just one in five of the Gen-X set was anxious about the day's events, as opposed to 100% of investors over 35. Finally, even though only 16.2% of online investors were happy with their online brokerage that day, they were more likely to move their money to another online firm than abandon the Internet. Only one in four was contemplating a switch to a financial advisor and thinking of decreasing his or her online assets and trading.

Web Savvy, Trade Averse

A separate study conducted by Prince & Associates examined the habits of 611 high-net-worth investors with $500,000 or more in investable assets showed that traditional investors had a very different take on the Internet and online trading. The pool of investors was drawn from 12 investment-management firms, all of which had password-protected Web sites. All of the investors had online capability, and they all spent more than five hours a week online for nonprofessional purposes. In other words, they were familiar with the Internet. In fact, 57.3% were reassured that their firm had a Web site and 73.5% assumed that leading investment firms had such a site.

However, 98.4% said that they would not select an investment manager based on its Web site, and not one of the 611 had gone online to search for an investment-management firm. Even though 37.8% of the group had an online trading account, on average, only 8.2% of their investable assets were online. Finally, perhaps predictably, 98.2% said that they preferred working with their advisor rather than going to a Web site. For this affluent group, the Internet was seen as an informational tool, not a transactional one.

The Power of Advice

Online trading, dire predictions aside, has not hastened the end of the traditional relationships between investors and brokers and advisors. If anything, online trading has only accelerated a trend that already was well under way, from a commission business to fee-based, guidance-oriented partnerships. The success-or at least the high profile-of online trading also has obliged traditional brokerage firms to offer clients a multichannel approach to investing, beefing up their Internet presence and online-trading capability.

The rise and fall of the Nasdaq, to which online trading was strongly tied, also has taken its toll on online trading. Online trading peaked in the first quarter of 2000, as did the Nasdaq, which reached the 5,000 mark on March 10 of that year. Since then, its fortunes have followed the Nasdaq, with new accounts and trading volumes way down, and even the leading online brokerages beset by layoffs and losses.

The Information Glut

Like the online brokerages, online investors learned some hard lessons during the downturn. Many lost money, of course, but they also got firsthand experience in information overload and the pressure of making decisions for themselves.

The research component of online brokerages, the ability to give investors the same reports and prospectuses that the professionals had, was a big selling point and also played to the conceit that the only difference between the experts and individual investors was access to data. But deciphering that information is not easy. And turning that databank of knowledge into action-and action that's in keeping with an individual's financial goals-is especially challenging. As one investor who defected from online trading to a financial advisor told The New York Times, "When you learn a little bit, you realize how much you don't know."

The paralyzing effect of information is evident in the way investors put money into mutual funds. Despite the attrac-