Personal Business: INVESTING
FINANCIAL SUPERMARKETS AREN'T SO SUPER
Ever since Travelers Group and Citicorp decided to get together, reams have been written about financial "supermarkets" and their plans for "cross-selling." The latter is a buzzword to describe stockbrokers selling mortgages, insurers flogging mutual funds, and bankers pushing stocks--all on behalf of the same mega-money-machine.
What hasn't been made clear, though, is whether giving business to one of these one-stop financial companies actually saves money or time. So I decided to go shopping. Could I do any better at the emerging supermarket companies than I've done by picking up my credit card at one place, my checking account at another, and my mutual funds at a third? Should I, in other words, be a crossbuyer?
The answer, I found, is probably no, or at least not yet. For all the hype, the art of cross-selling is still very much a work in progress.
Who would expect, for example, that a client of Travelers' investment subsidiary, Salomon Smith Barney, would have a hard time buying Travelers term life insurance through his or her stockbroker? But Laura Pantaleo, a Salomon Smith Barney senior vice-president in charge of insurance, estate, and trust services, says that "the Travelers' agency system is a totally different distribution system." While a Salomon Smith Barney client might well be a Travelers policyholder, "we would never [automatically] refer out our client to a Travelers' agent," she notes.
So what would happen? Well, first, your Salomon Smith Barney broker or financial consultant (FC in the new lingo) would help you assess whether you need life insurance. If so, the FC would then ask the firm to search among a dozen insurers it works with, including Travelers, for the lowest quote on a policy best suited to you. "It's a commodity product nowadays," Pantaleo notes, with quotes as readily found on the Internet as elsewhere.FEW SYNERGIES. Whether this arm's-length arrangement will persist once Travelers and Citicorp have merged into Citigroup, Pantaleo couldn't say. But so far, few cross-selling synergies can be found in that aisle of the virtual supermarket. And the story's the same over at Equitable, the insurance giant that owns the brokerage firm of Donaldson, Lufkin & Jenrette. "One would hope that the [broker] at DLJ would say, `I know an Equitable agent,' or `My brother is an Equitable agent,"' a spokeswoman says, but Equitable makes no active effort to sell insurance that way.
Merrill Lynch and most other big securities firms don't underwrite insurance themselves, but instead find quotes for clients from a variety of carriers, such as John Hancock. Insurers and banks offer stocks, mutual funds, central transaction accounts, and charge cards. Yet finding one company that does all things cheaply and well still proved elusive (table).
On stock trades, none of these giant outfits comes close to the prices charged by deep-discount brokers. I asked them for their lowest commission on a simple trade not made electronically by Internet or touch-tone phone but by talking to a broker. The rates ranged from $110.50 at Salomon Smith Barney to $29.95 at Citicorp's discount brokerage arm--all well above the $5 commission experienced investors can get away with at Brown & Co. Securities Corp.
Worse, though, is that the quotes from full-service brokers, which boast the broadest range of investment products, don't mean much. Typically, clients of these firms can demand commission discounts of 30% or so, with better deals going to the best customers. "That's the common practice," confirms an executive at one large full-service brokerage. So anyone who isn't savvy enough to ask for a break on the regular commission pays the higher rate--and the brokerage is more than happy to accept the extra money.
Not surprisingly, all the firms offer mutual funds. The difference is how many of what kind and on what terms. Full-service brokers including Merrill Lynch and Salomon Smith Barney offer no funds fully free of transaction charges--except those made available within "wrap" accounts that charge clients a percent or two annually based on the amount of assets in an account.HIGH RATE. Charles Schwab and some of the banks, notably First Union, have more funds that come without loads or transaction fees. But they might not offer other services or the best terms. Through Schwab, for instance, you can't get a credit card or a mortgage. At First Union, the interest rate paid on cash in its popular Capital Management Account was recently 4.7%--a good bit below the 5.09% paid by Merrill. Meanwhile, you can always call most any no-load fund's toll-free number and buy shares directly at no extra cost.
Conditions on transaction accounts that link to checking, bill paying, and other transactions also vary significantly. Suppose you saw Citicorp's relatively low stock-trading commissions and its competitive 7.125% mortgage rate, and they tempted you to consolidate more of your funds at the bank. Well, prepare for a lot of consolidating. The minimum balance Citi insists on for its CitiGold cash account is no less than $100,000. Any month the balance drops below that, you pay $25--an annual rate of $300. And despite carrying such a large balance, at Citi you still wouldn't find term life insurance in its menu of products. BankAmerica's Master Relationship Account requires $25,000 to start, but then costs $20 a month if your balance falls below $50,000 after one year. Yet unlike rivals, it didn't offer a 15-year $1 million term policy for a healthy 45-year-old woman. Its maximum face value was $300,000.
Elsewhere, the minimums are lower, but annual fees--$85 at NationsBank, $100 at Merrill--still mean you pay for a consolidated-account statement. Then again, you always have the choice of simply paying bills and writing checks on your pick of hundreds of money-market funds that offer competitive rates while charging no fees.
Consolidating your finances at some of the supermarkets doesn't ensure you'll get a wide and competitive choice of credit cards. While this seems bound to change once Citicorp is folded into Travelers, Salomon Smith Barney doesn't yet offer a true credit card. Instead, its Money Card--a beefed-up debit card--has no assured line of credit. Spending limits are set daily based on how much you have in your central cash account, even though charges are deducted only once a month. Schwab, too, just offers a debit card. At other supermarkets, you usually can select from a broad range of plastic, but the annual fees and interest rates charged on outstanding balances are nothing special.
Despite this load of petty complaints, you still might wonder which financial supermarket does all this best. Of the handful we surveyed, First Union seems to offer the most favorable mix of products, services, and terms--even though it's only the nation's sixth-largest bank and operates in just a dozen states, mostly in the South and East. Its goal is to feature an attractive line of products and services that most any type of customer might demand. That means providing basic banking and insurance and serving do-it-yourself investors, who are Schwab's target market, along with those craving advice--the traditional clientele of Merrill Lynch.
But remember: Like each of the supermarkets, First Union wants to deliver all this stuff at a price. "In the old-time supermarkets, you didn't get a whole lot of things," says Donald McMullen, CEO of First Union's Capital Management Group. "But today, you can get the freshest fish, fresh-baked bread, and so on. It's not necessarily cheaper than at the fresh-fish store or the bakery, but it's more convenient." At First Union, he says, customers "won't necessarily save money, but time." Indeed, First Union doesn't offer any no-point mortgages. Each comes with a 1% origination fee.
As these supermarkets strive to take over your financial life, this tradeoff between money and time is the main lever they'll use to pry you from your old habits. So just keep asking yourself: Is this one-stop shopping, this added line of services, this new product, this consolidated statement, this single source of advice truly saving me enough time to make up for the dollars I'll have to pay for it?EDITED BY AMY DUNKINReturn to top