| BUSINESSWEEK ONLINE : MAY 22, 2000 ISSUE | ||||||||
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| COVER STORY
On the Web--But with a Broker on Standby Wall Street's full-service firms offer advice along with e-trading Wall Street's full-service brokers want you back. After more than three years of watching discount online brokers vacuum up investors' assets, Merrill Lynch (MER), Salomon Smith Barney (C), and others are on the counterattack. Over the past 12 months, these leading Wall Street firms have rolled out accounts that give you fast online trading and advice from a live body. That suits Justin Marks, a 27-year-old Houston entrepreneur, just fine. Marks closed his E*Trade (EGRP) account and switched to Merrill Lynch after discovering he wasn't much of a stock-picker. He now pays 1% of his assets to Merrill so broker David Furmanski can help manage his money. ''It releases me,'' Marks says. ''It's worth it, if you don't want your life to be about moving money.'' Wall Street's big brokers want more investors like Marks. Ten years ago, leading full-service brokers controlled 84% of the nation's investment accounts. By the end of 1999, discounters had whittled that share to 55%, according to Cerulli Associates in Boston. Indeed, following the sharp sell-off in technology stocks this spring, many self-directed investors may now wonder whether it might have been worthwhile to pay extra for professional advice. And while the full-service brokers' new accounts are anything but cheap, the nice thing is that you don't have to pay huge commissions anymore to get assistance. At major full-service firms and such rivals as American Express (AXP), you'll find everything from fee-based accounts with unlimited online trading to self-directed trading through Web sites. These accounts are not for everyone--buy-and-hold investors who trade infrequently, for example, may be better off continuing to pay their brokers on a trade-by-trade basis. But you can now gain online access to brokers' research, initial public offerings, and a wide array of other products. Some firms even offer sophisticated investment, estate, and tax-planning services that most discounters do not yet provide. ''SLEEP BETTER.'' The convenience of having many services together recently persuaded Arlene Schindler, a Los Angeles writer who trades infrequently, to convert her conventional Salomon Smith Barney brokerage account to a Web-plus-human package. ''Every once in a while, I'll get a stock tip that I want to jump on, and the online account lets me trade without worrying about getting in touch with my broker,'' she says. But ''I still want to discuss things with her before I buy, when possible.'' Adds Schindler: ''I sleep better at night when the market goes down.'' Before you switch over to one of the new online plans, read the fine print--all of it. Maybe they're getting Webbed up, but the full-service firms don't always make it easy to understand their new accounts. Brokers have long had plenty of latitude to discount commissions to favored clients, and these new accounts are no different. You may have to continue haggling with your broker to push down your fees. Still, the new broker-assisted online accounts go a long way toward addressing a long-standing problem with full-service firms: the inherent conflict of interest in commission-based brokerage. Brokers who are paid commissions have a financial incentive to push unnecessary trades. In the new online accounts, brokers are paid an annual fee based on a percentage of your assets under management. This gives brokers a stronger incentive to build wealth rather than just make trades. Later this year, Prudential will offer a performance-based fee structure for full-service accounts. Brokers will be compensated based on how well they manage assets. To be sure, fee-based accounts are old hat on Wall Street. ''Wrap'' accounts that include professional portfolio management have been around for years. Their fees average about 1.4% of assets, but can be double that. The new accounts can cost considerably less but lack professional portfolio management. Take Merrill Lynch's Unlimited Advantage account, which has become the industry benchmark. With a $1,500 minimum, its 1% annual fee on the first $1 million of equity assets is the lowest on the Street (table). You also get unlimited trading. Most Merrill accounts under $1 million pay less than 1%. Merrill charges 1% on the first $1 million in equities, but only 30 basis points--or three-tenths of a cent on the dollar--for the first $1 million in bonds and mutual funds. So a $300,000, all-equity account will cost you $3,000 per year. If half the account is in mutual funds and bonds, the fee falls to $1,950. At Morgan Stanley Dean Witter (MWD), a $300,000 equity account costs $5,250. The 50-50 stocks-and-bonds account costs $4,875. But you can obtain discounts. Wherever you open an account, keep in mind that fees are paid every quarter. Depending on the broker, the fees are based either on average assets for the period or your balance at the end of the period. Merrill and Morgan Stanley are also offering self-directed accounts, charging $29.95 a trade--the highest rate charged by Charles Schwab (SCH), the No. 1 online discounter. The new accounts are competitive in other ways. They allow access to two key products: analyst research and IPOs. And they let you stash spare cash in high-interest, federally insured money market accounts--a feature now offered by E*Trade, but not Schwab. Self-directed accounts with full-service firms come with an option no online discounter can provide: one-on-one sessions with a real, live broker who can help you pick stocks. At Morgan Stanley, customers who sign up for MSDW Online can ask to have a broker assigned to their account. Customers can call the brokers for free advice on trades--a broker will get part of your $29.95 fee. But ''it's between the customer and the broker to decide how involved they get,'' says Thomas O'Connell, president of MSDW Online. The catch: Brokers use the relationship as an opportunity to sell customers such other Morgan Stanley products as planning and insurance. Customers of Merrill's self-directed account, ML Direct, can't consult a broker on trades. But for $250, ML Direct customers can purchase the same 90-page, leather-bound Financial Foundation Report that wealthier clients receive and go over the results with a broker. The report covers your net worth, insurance needs, education, retirement, estate and tax planning, and offers a risk analysis of your asset allocation. Not all active traders find the new accounts cost-effective. Don Steiner, a 40-year investor and retiree in Hawaii, makes 20 to 30 trades a month, paying $14.95 per transaction at Fidelity Investments. He keeps a commission-based account at Merrill ''to have someone to bounce things off of.'' But he figures an Unlimited Advantage account is not worth the price. Indeed, if you put $300,000 in equities in Merrill and make an average of eight trades a month, you'd pay $31 per trade. DOUBLE FEES. Before you sign up for any account with a full-service firm, look out for surprises. At Prudential, you'll pay $29.95 per trade on top of an annual fee. And at any broker with an asset-based fee plan, you'll pay twice for holding mutual funds--once in the account fee and again through management fees charged by each fund you own. You thus could easily end up paying 2.5% or more to hold mutual funds--a bad deal indeed. Most firms have a 45% maximum on mutual-fund assets held in asset-based accounts. And buying mutual funds through fee-based accounts can be tricky. Merrill waives loads on all funds it sells. But Morgan Stanley only waives them on 900 of the 5,000 sold by the firm. Despite such flaws, an online account at a full-service firm may be just the ticket for investors with stock-market jitters--or who don't have the time or inclination to spend the day glued to their PCs watching quotes and message boards. Having a human to help you filter the financial information glut on the Web isn't cheap. But it sure can be convenient and reassuring to have someone to call when markets get rocky. By GEOFFREY SMITH With Elaine Silver
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