Great article, Spytrader
Here's Slate Magazine's take on Merrill's announcement:
moneybox
Merrill Lynch Bows to the Inevitable
By James Surowiecki
At this point, hearing someone talk about his stockbroker sounds
about as odd as having someone tell you he wants to go the soda
fountain for a root-beer float. The mainstreaming of discount
brokers--most obvious in the precipitous rise over the last decade
of Charles Schwab--and, more recently, the advent of online trading
(remember that the two phenomena are actually distinct, although
online trading has certainly accelerated the growth of discount
brokers) has revealed brokerage commissions as the preposterous
vestiges of a regulated era that they always were, while the bull
market has arguably convinced people that they're smarter traders
than they really are.
Of course, a huge number of Americans still have stockbrokers. If
you spend too much time on the Internet, it's easy to believe that
everyone else does as well. But the number of investors who use
E*Trade, Ameritrade, Datek, and all the rest is still dwarfed by
the number who invest through Merrill Lynch, Paine Webber, etc. But
this will not last forever, which is why last week Merrill rocked
the brokerage industry by announcing that at long last it would be
offering its customers online trading for $29.95 a trade. That's
still almost four times as expensive as the cheapest discount
brokers, but when you consider that Merrill's average commission is
currently better than $200 a trade, it's a significant concession.
Not surprisingly, the market almost immediately knocked Merrill's
stock down sharply. The company employs 14,000 brokers, and derives
a quarter of its annual income from its retail brokerage business.
That doesn't look like a company that will be able to adjust to an
entirely new cost structure with the greatest of ease.
Merrill is hoping that it can retain its brokers by encouraging
most of its clients who are interested in discount trading to move
instead to what Merrill's calling a relationship account. That will
give clients access to a real broker and assorted other perks--Visa
card, ATM and checking access, mortgages--in exchange for 1 percent
of a client's annual assets. The logic behind the relationship
account is sound, so sound in fact that one wonders why Merrill
didn't embrace it before. (The answer, of course, is that it didn't
want to give up those fat commission checks.) Charging per-trade
commissions was always an incredibly dubious approach, given the
fact that the broker's incentive was to encourage his clients to
trade, even though trading heavily is, for most people, a recipe
for disaster. Going to a fee-based structure at least takes that
incentive away.
The broader question, though, is whether the advice people get from
their brokers is worth 1 percent of their assets. It's undoubtedly
true that the hype surrounding online trading has given people a
false impression of the ease with which money can be made in this
market. Reading this week's New York magazine, for instance, it's
impossible not to feel as if all these stories about people making
hundreds of thousands of dollars day trading always fail to omit
the crucial coda, when the day-trader's favorites stocks crash and
his fortune dries up. The next time you hear someone talk about how
much money he's made, ask him how much he started with and when and
then compare his performance to the market as a whole. Only rarely
will you find someone outperforming the market over any significant
period of time.
But that doesn't mean that brokers are going to do any better. The
argument that brokers are important because they help people think
concretely about things like asset allocation, planning for the
future, and savings patterns has always seemed plausible to me. But
looking to brokers for stock tips or inside information is silly,
because it rests on the idea that brokers have some special insight
into the market. They don't. Now, they may very well be smarter and
know more about investing than their clients. But that's
irrelevant. The only important question is whether they know more
than the market does. If they don't, the alternative is clear:
Invest in an index fund.
In the wake of the Merrill announcement, we're hearing a lot of
people say that brokers take an unfair rap. The New York Times went
so far as to write, "Many are honest and hard-working, and bring
years of experience and professionalism to bear on their clients'
behalf." That's probably true of brokers, just as it's true of
barbers and optometrists. But it doesn't matter. What brokers were
expected to do was always beyond their capabilities. It just took
deregulation and the rise of real competition to make that clear. |
