Brokers were supposed to have their hands full fighting off online discounters and lower fee pricing. So far, the opening bell has yet to ring. Strong markets and personalized solutions have helped brokers avoid severe pricing pressures.
It was called the second May Day. In June 1999, Merrill Lynch sliced its fee-based brokerage pricing by a third or more in launching its Unlimited Advantage account. At the same time, Merrill announced plans to roll out a new online discount operation, Merrill Lynch Direct.
Other firms have since taken steps to revamp pricing on their fee-based brokerage accounts. And Morgan Stanley Dean Witter, like Merrill, incorporated a discount operation under the same roof.
As a result, the future of full-service brokers was called into question. The Wall Street Journal reported that Merrill's reps were "jittery" about their pay. "This is about Merrill booting their own brokers," declared E superscript *Trade Chairman Christos Cotsakos in The New York Times. And all the full-service brokerage stocks got hammered.
Reality has proven to be a different story. Brokers say price pressures haven't had a major impact on their businesses. At least not yet.
"Actually, right now, [the demand for lower fees] is not much of a problem, because we have a booming market," says a Morgan Stanley Dean Witter broker on the West Coast. "But the firms are looking ahead. In a less-than-outstanding market, when we have to get more competitive, there will be more asset gathering. That's when these lower-priced fee accounts will become more attractive to the investor."
Such accounts may be touted as a way to attract future business, but some reps doubt the hype. "Most individuals with real wealth want full, customized service and don't mind the fee structure," says Marshall Eichenauer, a PaineWebber broker in Newport Beach, Calif. "If you work for 30 years, you're not going to want to gamble with your life savings. [You want] sound professional advice. Good clients don't mind paying for it."
Stealing From Schwab Looking longer term, brokers do anticipate more competition.
One Merrill rep in Missouri says the Unlimited Advantage account was - and is - an aggressive asset-gathering ploy designed to compete with Schwab.
"The intent of Merrill is to steal clients from Schwab by not making price an issue," he says. "The idea is to get assets."
As investors need more help and have more complicated problems, they'll demand higher-priced products and services, the rep says. "It's a great idea, if it works."
Veteran Merrill broker Calvin Cramer in Manchester, N.H., says the lower fees have helped him increase his income. "Obviously you're working for less money so you've got to add assets," he says. "But with the fee being 1%, you can attract other accounts."
A case in point is one $500,000 account that brought over another $300,000 from Schwab. "When I showed him fees were comparable but the service better, that $300,000 glommed onto the $500,000," Cramer says.
The MSDW rep on the West Coast says her firm's lower fees and discount unit are also part of a longer-term strategy. When do-it-yourselfers hit a rough patch, "they may want full service and they'll already be bound to the full-service firm" through the discount programs, she says.
But now, with business growing 20% to 30% a year, "I don't have a need for a lower-priced fee program," says the Merrill rep in Missouri. "I'm willing to discount up to a point but frankly, no one has asked. I've built my business on personal relationships. I don't see Schwab, discounters or lower fees as an issue."
Why have full-service brokers escaped serious price pressure?
For one thing, they don't compete on price. "We can never be price competitive with the discounters," says Marshall Eichenauer, a PaineWebber broker in Newport Beach, Calif. The difference: personalized services.
"A lot of people have drawn battle lines between discounters and full-service firms," Eichenauer says. "But I tell people to do it yourself only if you have the time, the interest and the knowledge. If any one of those is absent, hire an adviser."
Mistakes cost far more than any commission or fee, he says. One of Eichenauer's clients tried to do it himself by putting half of a $1 million rollover into biotech and the other half into tech stocks - based on six- to 12-month performance. "He lost almost $300,000 in the past six months," Eichenauer says. "He didn't have the knowledge."
A Merrill Lynch broker on the East Coast says price pressures might force reps to pare back households and annuitize smaller accounts. But the rep insists that brokers have always gone after high-net-worth clients who are not price sensitive, so brokers haven't been impacted.
And while the lower pricing on fee accounts seems like it would attract the price-sensitive masses, most firms require $50,000 minimums and charge minimum annual fees of $1,200 to $1,500. "If you're a very active trader that might be a good deal," says a PaineWebber rep on the West Coast. But the accounts are not structured for the average client looking for a discount, he says. Instead, they are an alternative method of paying for advice.
