Broker Lite--Everything Clients Want in a Full-Service Firm, But Less

"There's a new way to work with Merrill Lynch--any way you want."--TV adAt first, it seems counterintuitive, even oxymoronic. Like Bayer introducing a new "non-aspirin" pain reliever. Or Volvo manufacturing a line of cars without air bags. It's the idea of full-service brokerage firms scaling down their services--and their prices--to cater to do-it-yourself customers.Nevertheless, the era of "Broker

"There's a new way to work with Merrill Lynch--any way you want."--TV ad

At first, it seems counterintuitive, even oxymoronic. Like Bayer introducing a new "non-aspirin" pain reliever. Or Volvo manufacturing a line of cars without air bags. It's the idea of full-service brokerage firms scaling down their services--and their prices--to cater to do-it-yourself customers.

Nevertheless, the era of "Broker Lite" has arrived. Full-service firms are designing more flexible accounts for clients and building friendly places for them to trade online.

It's a battle for a different demographic group, says Steve Galbraith, a brokerage analyst with Sanford C. Bernstein & Co. in New York. "Guys who use full service have always had all the money," he says. "But the emerging wealth is with baby boomers. These are the people who have been attracted to the Schwab model of empowerment and self-management. ... [Brokerage firms] are trying to open up their product suite to the lower demographic--the smaller chunk of change."

In doing so, firms are starting to create these halfway offerings--somewhere in between do-it-yourself and full-service:

* American Express Financial Advisors launched American Express Brokerage, its discount Web-based investment service, in November. Discount clients can call an 800 number to speak with a registered "financial consultant" about general investment questions. They can also find a full-service adviser through the firm's Web site. Full-service reps on AEFA's gold and platinum teams are allowed to charge hourly fees, which will allow them to work with these discount customers.

* Prudential Securities' head of private client services Dennis Drescher has said the firm is considering a new version of its Advisor account that would charge clients a retainer based on the amount of time they spend with a financial adviser.

* PaineWebber suggested it might consider charging an "a la carte" fee for a certain number of consultations with a broker.

"We can be sure firms are considering every variation on this theme," says Michael Flanagan, a brokerage analyst in Fort Washington, Pa. "The bottom line is firms don't want to alienate the investor who today only has 10,000 dollars, but tomorrow may be the prime full-service investor."

Better Service for Smaller Accounts Some firms already provide service options to smaller accounts. Merrill Lynch introduced its 24-hour, seven-days-a-week Investor Services Group in 1998. Some brokers like having an outlet for clients they can't service adequately or those who don't fit the priority-client mold.

"The people we're referring to [Investor Services] are our smaller and less productive clients--accounts under 100,000 dollars," says a Merrill rep in the Southwest. "I'm trying to focus solely on clients who have 250,000 dollars or more of investable assets and who are going to generate minimum revenue of 5,000 dollars a year."

Nevertheless, this rep says he doesn't want to relinquish clients with smaller assets entirely--and the firm doesn't either. Once referred to Investor Services, clients can call into a bank of registered reps to get the advice they need. The referring brokers get paid for any business those clients do.

"It's almost a gimme," the rep from the Southwest says. "If the account grows and gains priority status, I'm notified and I have the right to bring it back in the future."

Merrill hasn't said how it intends to service its new Merrill Lynch Direct online clients and what, if any, interaction these customers may have with the Investor Services Group or full-service reps. The firm says it will have several around-the-clock call centers to provide assistance, but not advice.

A branch locator on the Direct site enables clients to find Merrill offices in their area. The site also lists upcoming broker-sponsored seminars and events. And according to Merrill officials, clients can consolidate their Direct accounts with other accounts. Reps whose existing clients open Direct accounts will not be compensated on the self-directed assets, but the assets will count toward any asset-gathering bonuses.

In October, Morgan Stanley Dean Witter renamed its Discover Brokerage discount unit to MSDW Online. Reps receive a small amount for trades initiated by their full-service clients who open MSDW Online accounts. Furthermore, MSDW appears to have taken a cue from Schwab by turning its 450 branches into service centers, where online clients can deposit funds and take careof paperwork. Each branch has a designated customer service rep to answer questions about online and full-service accounts.

"Anyone calling in to inquire will talk to a customer service representative in the branch," says Randy Colombo, a producing manager with MSDW in Berkeley, Calif. "Instead of predetermining which niche a customer falls into, we're allowing a CSR to discuss what his needs are. ... The concept is to broaden our base of customers and give the investing public exactly what it wants."

What's the Next Move? Some of the first planks are being placed now, but what will the bridge between discount business and full service really look like? Will full-service firms continue to lower their advisory fees and or will they provide a la carte pricing alternatives for the middle market?

Right now, the closest thing to a la carte is Merrill's 250 dollar charge for a financial plan. But without self-directed options and little promotion other than internal quotas, the service hasn't been a major draw for nonclients. Plus, other firms don't charge for a plan.

Additional considerations for the major firms include charging, say, 75 basis points a year for a dedicated broker and an annual consultation. Asset allocation could be provided through a licensed customer service rep who gets paid a salary plus a bonus, similar to Schwab.

"Firms are thinking about it," Galbraith says. "I wouldn't be surprised if one the big firms actually makes those moves in the next couple of years." He says full-service firms can deliver "Broker Lite" more effectively than online discounters because of their superior research capabilities and ability to provide a quality advisory relationship for less than what some Schwab-affiliated advisers charge.

A November report from Forrester Research in Cambridge, Mass., suggests that brokerages could borrow a framework from the health care industry to serve middle-market clients. "'Advice HMOs' would serve most investors well," the report says. These customers would pay small premiums to have basic investment needs serviced by a generalist. If more complicated needs arise, such as inheritances, they are referred to specialists.

What will be the sweetener for brokers in these new business structures? The growth potential.

"I would much rather get a 70 to 75 basis point share of something growing 30 percent a year, than a 1.5 percent share of a declining annuity," Galbraith says.

Compensation issues aside, it may be difficult for full-service reps to keep up with all the changes and new accounts. But for most, it comes down to continuing to service the traditional full-service customer, without ignoring tomorrow's full-service customer.

Flexibility is required. "Rather than us do business our traditional way, we're trying to let clients do it their way," says John Cook, a Prudential Securities rep in Little Rock, Ark. "The innovations provide clients a way to do business that wasn't available before. It gives them a choice."

In an evolution of their services, no-load mutual funds are going beyond toll-free telephone service reps to provide investors with an advice option. Vanguard offers mutual fund investors access to one-time or ongoing guidance through its Financial Planning Services program. Launched in 1995 and staffed with certified financial planners, the service is growing at a tremendous rate, says Vanguard spokesperson Brian Mattes.

"There's been tremendous investor demand for that service," Mattes says. "The [CFP] group that started in one part of our Vanguard building now occupies a full building."

Mattes says the Vanguard financial planners are not part of the regular customer support staff. The financial planners' sole purpose is to provide one-time or ongoing help. For the one-time program, Vanguard charges investors 500 dollars. For ongoing help, investors pay a 50 basis point annual fee for advice on an all-Vanguard portfolio or 65 basis points if the portfolio includes non-Vanguard funds. The advice is provided over the phone, or by fax and letter.

Other no-load fund companies are experimenting with similar pricing. In October, T. Rowe Price unveiled its Retirement Income Manager (RIM) program. The service helps investors determine how to spend money in their retirement years.

The plan costs 500 dollars and includes an annual review by an in-house specialist for the rest of the investor's life. Investors first fill out a 30-page-plus questionnaire detailing the assets they're bringing into the program. T. Rowe Price takes the information, runs it through sophisticated computer modeling that simulates market returns and comes up with recommendations for the client.

"The plan shows them the amount they can withdraw on a monthly basis, the investments they need to support the process and the probability percentage that their assets are going to last their lifetime," says Ed Giltenan, a T. Rowe Price spokesperson.

Each plan is reviewed by an in-house financial planner, and each customer has access to a dedicated retirement specialist whom they can contact via phone or e-mail. As of early November, the plan was attracting strong interest.

"In one week, we had more than 1,200 requests for applications," Giltenan says. "Many of these were coming from adult children calling for their elderly parents. However, this is a potentially huge market for baby boomers. ... Figuring out how to spend money in retirement is more complicated than saving it."

Giltenan says that the RIM program is not an attempt to attract the typical full-service brokerage customer. It is geared toward self-directed investors who have been comfortable managing their own investments, "but who at this crucial point in their lives are looking for some extra advice," Giltenan says. "They're retiring with assets of 250,000 dollars to 750,000 dollars. People with more than that would go to a CFP. People in this asset range are not so quick to go out and pay a CFP."

The RIM plan can be implemented outside T. Rowe Price. Currently, T. Rowe Price employs just 10 retirement specialists to assist investors. Some are CFPs, but all at least have Chartered Retirement Planner designations.

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