| BUSINESSWEEK ONLINE : JUNE 14, 1999 ISSUE | ||||||||
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| NEWS: ANALYSIS & COMMENTARY
Merrill Is Bullish On the Internet Can it make a go of flat-fee trading? For a quarter of a century, Charles Schwab has railed against the evils of brokerage commissions. Since launching Charles Schwab & Co. in 1974, Schwab has prospered by charging investors a flat price per trade--which eliminates the temptation by brokers to push trades just to generate commissions. More recently, E*Trade Group Inc., the Internet trading upstart, has joined the fray. It even runs ads that mock traditional brokers as hustlers more interested in their commissions than their customers. For all those years, full-service brokers defended their way of doing business, pointing to all the advice and handholding that the commissions pay for. On June 1, however, Merrill Lynch & Co. made a tactical retreat--conceding that Schwab and all those Internet upstarts had reduced executing a buy or sell order to a simple commodity. The Wall Street behemoth announced that in December, it will go head to head with Schwab and E*Trade by offering online trading for a flat $29.95 per-trade fee. But Merrill's not about to give up its old ways of doing business--or its 14,800 brokers. The true centerpiece of its strategy is another new account that it will roll out on July 12. It will include online trading, but that will just be a convenience. The real thrust is to offer clients a full range of Merrill services--access to an actual broker, financial planning advice, and a Visa card--all for an annual fee based on a percentage of assets in a client's account. ''We had to turn our pricing model upside down,'' says David H. Komansky, chief executive of Merrill Lynch & Co. ''We wanted to get away from the last vestiges of transaction-based pricing and go forward with fee-based pricing.'' Merrill Lynch is still bullish on brokers. But in two years, the firm expects to have over 20% of its customer assets in the new fee-based accounts, says Vice-Chairman John L. Steffens. Merrill currently has just 6% of its $1.5 trillion in customer assets are in such accounts. ''We are trying to create a value proposition based on the totality of what we do, rather than on transactions,'' says Steffens. That is the high road Merrill hopes to follow. But its move clearly acknowledges the massive pricing pressure placed on the full-service brokers by online trading. ''The Internet is making the traditional pricing mechanisms much more transparent,'' says Morgan Stanley Dean Witter analyst Henry McVey. ''Clients know more about expense ratios, commission rates, and mutual fund performance. Traditional financial intermediaries are scrambling to catch up.'' GLOAT FEST. Not surprisingly, online rivals are gloating. Schwab says that Merrill is copying Schwab's fee-based Internet business model. ''Clearly, they're totally moving away from the traditional commission structure. It's great for the consumer,'' says David S. Pottruck, Schwab's co-CEO. He says that Merrill's plan to match Schwab on the $29.95 flat per-trade fee suggests that Merrill believes ''there's no difference in service that makes Merrill worthy of a higher price. We agree with that.'' Others are even more dismissive. Says Christos M. Cotsakos, chairman and CEO of E*Trade: ''It was kind of reactive. It's kind of the same old stuff.'' Cotsakos believes E*Trade's June 1 deal to buy online bank Telebanc Financial Corp. bolsters its online offerings. Merrill execs told analysts that its new pricing model would have no impact on earnings. But investors were skeptical: its stock fell from 84 on May 28 to 70 on June 2. ''They are taking their stated pricing down more than 80%,'' says Sanford C. Bernstein & Co. analyst Sallie L. Krawcheck. She says the average commission now is $210 per trade and cut her 2000 earnings forecast for Merrill from $4.90 to $4.15 per share. Merrill is clearly on the defensive. Komansky concedes that ''We probably made a mistake up until now not serving those [online] needs.'' And Merrill is still not convinced that bare-bones trading is really what the customers want. It's betting that the majority of investors want a human being to provide advice and assistance in all phases of investing. The firm says it even hopes to add 6,000 brokers in the next five years. For the next two years, it also plans to compensate its brokers for loss of income from the pricing changes. It's a big bet. But Merrill believes that it can increase its revenues and maintain its leadership, even as the Net changes the business. ''I do not see advice and guidance disappearing. We're basically saying execution is a commodity,'' says Komansky. ''It will be who can provide to the market place the most compelling value proposition.'' Certainly Merrill is operating from a strong position. It has 5 million customers and 3.3% of U.S. financial household assets. Schwab trails with 1.6%. But to keep its customers--and perhaps garner more--Merrill could no longer ignore the online alternative. It may be late, but at least Merrill has joined the movement. By Leah Nathans Spiro, with Timothy J. Mullaney in New York and Louise Lee in San Mateo, Calif. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Merrill Is Bullish On the Internet TABLE: How the E-Brokers Stack Up Commentary: Can a Merrill Be a Maverick? INTERACT E-Mail to Business Week Online | |||
