Merrill’s Online Launch Aims to Restore Leader Image
Merrill Lynch & Co. today rolls out its $29.95 online-trading account, a move that its own shareholders are hoping will reinvigorate the brokerage giant’s image as a financial-services growth company.
Merrill, which is following such full-service competitors as Morgan Stanley Dean Witter and Prudential Securities into the online world, will most likely continue to see the profitability of its retail business shrink under the assault of competition from do-it-yourself online firms, analysts say.
Donaldson Lufkin & Jenrette analyst Joan S. Solotar estimates that the Internet war will subtract $100 million from Merrill’s bottom line in the coming year. Commissions are Merrill’s largest single source of revenue.
Yet she rates the stock a “buy,” betting that the online strategy will keep Merrill’s wealthy customers from straying and will attract new ones who might otherwise not have considered such a bastion of the Wall Street establishment.
The new account, known as Merrill Lynch Direct, allows customers to buy and sell stocks online for $29.95 a trade--the same price charged by rival Charles Schwab & Co., the largest Internet broker.
In pricing it that way, “Merrill is saying, ‘Let the battle be over content,’ ” said brokerage-industry analyst Henry McVey of Morgan Stanley Dean Witter.
Indeed, Merrill thinks it will have an edge in content because of its large and well-regarded investment research department.
Online customers--who must deposit a minimum of $20,000 in the account--will get point-and-click access to the same research reports as full-service clients. Merrill is also developing Internet shopping and auction services and expanding its bonus credit-card program to the online service.
Merrill’s technology officers also note that while the firm is new to online trading, the software for the new account is adapted from systems that have been used by Merrill brokers and traders for years.
Based on sneak previews of the new service in recent weeks, analysts expect today’s debut to be strong. But they also note that Merrill will hedge its bets by withholding major advertising until February, after it has had a chance to work out any bugs.
Merrill’s $20,000-asset minimum for an online account is far above what most competitors require. Customers of the online unit won’t get a broker’s advice with that service, nor, the firm says, will its brokers solicit online customers for business.
What Merrill is hoping is that new customers will be lured by Merrill research and other features to the online service, and then will eventually sign up for broker-tended accounts.
Existing clients (Merrill has 5 million total) who want an online option, meanwhile, now don’t have to leave Merrill to get it.
But the dangers in the online plan are as big as the opportunities--an issue that may be helping to depress Merrill’s stock. At about $80 now, the stock is no higher than it was early in 1998.
“It all boils down to execution,” McVey said Tuesday.
The possibility of technological glitches or other missteps in an arena where the company is playing catch-up means that Merrill, as a company, must be viewed as a riskier proposition than when its retail-brokerage dominance was unquestioned, said McVey, who is “neutral” on Merrill shares.
But DLJ’s Solotar said Merrill Lynch Direct seems more flexible and technologically advanced than some other Net brokerage offerings.
Merrill, for example, allows customers to consolidate all their accounts into one “view” on the computer screen. Morgan Stanley’s online account and DLJ’s own DLJ Direct keep full-service and self-directed accounts separate.
The move onto the Internet is part of a two-pronged response to competitors such as Schwab and E-Trade Group that have lured away Merrill customers with cheaper commissions and a trading platform accessible by personal computer.
Step 1 came in July when Merrill created its Unlimited Advantage account, offering unlimited Internet trading with a broker’s advice for a minimum annual fee of $1,500.
That account has attracted $3.2 billion in net new assets--one-fifth of the money that has come to Merrill since July, spokeswoman Susan Thompson said.
The big ad push for Merrill Lynch Direct won’t come until after the Super Bowl, in late January, Thompson said. She explained that few people focus on their finances in December and that people are particularly reluctant to make changes this year because of concerns about the year 2000 computer problem.
“We figured the money is better spent after the dust settles on Y2K and we’re past the holidays,” Thompson said.
Some think that shrinking commissions and the “cannibalization” of customers by the Internet offering will lead to wholesale defections from the ranks of Merrill’s 18,000-plus brokers.
But Solotar believes such predictions to be wrong on both counts.
Merrill’s customers may dabble with online trading, just as many of them have long set aside a portion of their assets for self-directed trading, she said. But fundamentally, they are at Merrill because they want a broker’s advice, she said.
Merrill brokers, meanwhile, must realize that the entire industry is moving online, she said.
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Merrill’s Mix
Commissions still provide the bulk of Merrill Lynch’s revenue, despite growing contributions from its trading unit, investment banking fees and asset-management fees. Percentage of operating revenue from each source, for the first nine months of 1999:
Source: Merrill Lynch & Co.
Other 3.0%
Inv.
banking
17.1%
Commissions
31.6%
Asset
mgmt.
23.7%
In-house
trading
24.6%
