Merrill Going for Assets Over Quantity
In the new securities business, Merrill Lynch & Co. wants you to know, it isn’t about generating transactions, it’s about gathering assets. Not everybody agrees.
The new securities business, of course, is the one created by Merrill’s decision this week to become a discount brokerage of sorts--it plans to plug its 5.4 million U.S. customers into Internet trading by year-end at $29.95 a trade or for a flat annual fee starting at $1,500.
In effect, Merrill is saying to clients lured away by cheap and convenient online trading: “You want trades? We’ll give you trades. Just keep your money parked here.”
With little doubt that Merrill’s fat-commission rivals will be forced to bring out their own cut-rate offerings, investors in brokerage stocks see a price war with nothing but crumbling profit margins from here to the horizon.
That’s what’s behind the industrywide sell-off, with Merrill shares down 16% in two days, E-Trade Group Inc. falling 14%, Charles Schwab Corp. off 9%, Morgan Stanley Dean Witter & Co. down 8.6%, and DLJDirect, the online-brokerage unit of Donaldson Lufkin & Jenrette Inc., down 22%.
But not to worry, Merrill says. We’ll make it up on bulk.
Over the long run, according to Merrill Chairman David H. Komansky, advisory fees, based on the size of an account rather than the number of transactions, will bring in more than what is lost through lower commissions.
“We think commission business is sort of a dying breed,” said Donna DiIanni, a broker in Merrill’s Bridgewater, N.J., branch office who appeared, along with the firm’s top brass, at Tuesday’s news conference announcing the new strategy.
“This [plan] takes the emphasis off transactions and puts it on advice,” she said. She and other Merrill officials said weaning brokers off commissions will keep them from encouraging clients to do too much trading.
But--at least from a brokerage’s perspective--there’s something to be said for being transaction-intensive, noted Bill Burnham, analyst for C.S. First Boston.
“I can have $100 million in my account, but if I’m not trading I’m not making them any money,” Burnham said. And wealthy people won’t stand still for being soaked with bigger management fees.
Burnham noted that E-Trade, with an average account size of just $23,000, has what might be considered a less enviable customer base than its larger rivals. Schwab’s average account is $93,000, and Merrill’s is around $350,000.
But its hyperactive clients give E-Trade awesome “asset productivity,” Burnham said. E-Trade generates 2.5 cents of revenue per dollar of assets to Schwab’s 0.7 cents, he said.
Burnham didn’t have comparative numbers for Merrill, but he said that if the firm’s brokers stop encouraging customers to buy and sell, productivity can only go down.
Other analysts believe that Merrill’s approach should cushion it against a bear market and a severe drop in trading volume because the management fees will still roll in.
“In a downturn, the value of advice is accentuated,” said Bill Doyle of Forrester Research in Boston.
Realizing its vulnerability to a drop in transactions may be what has prompted E-Trade to diversify. Just Tuesday, it announced a deal to buy Telebanc Financial Corp., an online banker.
