October 21, 1999
Full-Service Brokerage Firms Seek Foothold Online
By JOSEPH KAHN
Morgan Stanley Dean Witter calls it "ichoice." Merrill Lynch named its offering "unlimited advantage." But the message from America's two biggest traditional brokerage firms is the same: Clients can trade stocks on line for cut-rate prices and keep their broker, too.
Morgan Stanley formally introduced an overhaul of its brokerage operation yesterday, matching a revamping Merrill began in June and expects to complete by Dec. 1. The two Wall Street firms had watched warily as on-line rivals turned stock trading into a commodity and lured customers away from them with relentless advertising, some of which attacked brokers as expensive anachronisms. Now, they are planning their counterstrike.
"The world has changed," said James F. Higgins, president of Morgan Stanley's private client group. "The traditional way of dividing the market into full service on the one hand and self-directed on the other is not what it's about."
What it is about, the full-service firms now say, is finding a way -- and a pricing structure -- that allows customers to trade cheaply when they want to but to fall back on the help and advice of a broker when they do not. That model theoretically serves a range of clients, from the aggressive do-it-yourself stock picker who likes to bounce ideas off a broker now and then to a busy executive who relies mostly on his broker but wants to dabble at trading on the side.
Morgan Stanley, Merrill and other leading full-service firms like Paine Webber and Prudential Securities are converging on a solution. In exchange for paying a percentage of their invested assets, customers can trade as much as they want and keep ties to their brokers, these firms say. The fee-based accounts range widely in pricing, and the firms offer other types of accounts as well. But it is clear that the emphasis in the industry has shifted to paying a standard quarterly fee in exchange for a menu of brokerage services that includes trading and advice.
"Mixing advice with do-it-yourself is a successful model," said Richard Strauss, a brokerage industry analyst at Goldman, Sachs. "More and more, people want to do it themselves, but they also want the hand-holding, the service and the attention."
The full-service firms are cutting prices. Like Charles Schwab, the leading on-line brokerage firm, both Morgan Stanley and Merrill will charge $29.95 for Internet trades for cost-sensitive, do-it-yourself investors, though that level is still several times that of their lowest-priced rivals on line. For clients who choose to pay a fee on money invested, the comparison is harder to make. Morgan Stanley, for example, is quoting a wide range of fees that depend on how much money is invested, what kinds of investments are made and how much advice the client wants. But fee levels are coming down as well, to the point that some analysts see the cost advantage long enjoyed by on-line firms becoming less of a factor in the future.
Whether the proposed combination of full-service and self-service allows the traditional firms to claw back market share from rivals on line is another question. Schwab, E*Trade, Fidelity and many other on-line brokers are also offering enhanced services for their best clients, moving away from the no-frills model that attracted the most self-confident investors to the Web in the early days. Schwab in particular has tried to hog the middle ground -- the area between advice and self direction -- that the full-service brokers are now rushing to fill.
"I don't think this is going to stop the migration" from full-service to on-line brokerage firms, said L. Russell Keene, an on-line brokerage analyst for Putnam, Lovell, de Guardiola & Thornton. "This is something they have to do anyway because of their infrastructure. They don't have a choice."
Indeed, both Morgan Stanley and Merrill have designed new retail brokerage models around, no surprise, their brokers. Merrill has 18,000 of them; Morgan Stanley, 12,000. Internet trading has been an unending nightmare for full-service brokers, who are losing clients to on-line competitors and seeing themselves belittled in television advertisements. But the full-service firms are trying to change that image.
Both Morgan Stanley and Merrill are increasing ad spending -- Morgan Stanley said yesterday that its spending over the next year would double, to more than $100 million -- to promote the idea that brokers and self-starting Internet traders belong at the same firm. They will be competing to be heard amid a blitz of ad spending by on-line firms urging the opposite. But after months of plotting how to deal with the Internet challenge, full-service firms now have something new to sell.
And they have some advantages that on-line competitors will find hard to match. Both Merrill and Morgan Stanley have blue-chip investment banking operations along with their brokerage business. That means customers can have access to first-run stock research, buy stocks underwritten by the firm, get advice from a broker and trade on line themselves, all under one roof. Morgan Stanley is a step ahead of Merrill in this regard. Merrill is still setting up the technological infrastructure to allow all of its customers to trade on line. Morgan Stanley plans to introduce its new integrated platform today.
"Unlike anyone else, they combine all the elements -- content, technology and advice," said Guy Moszkowski, who follows the industry for Salomon Smith Barney. "Customers tastes are evolving rapidly, but there are clearly people who want it all." |
