Merrill Online Brokerage Focuses On Niche

(Dow Jones) Traditional e-brokers aren't likely to lose their most-prized customers-active traders-to Bank of America Corp.'s new Merrill Lynch online brokerage.

Merrill, for its part, isn't necessarily targeting this class of investor, even though they are a major source of revenue for the biggest of online brokers. Rather, Merrill's service will allow the wealth manager to keep some valuable client relationships in-house and perhaps bring in some others who would be open to using an advisor.

Merrill's well-known brand, the competitive pricing of its new online trading platform and its bundling of various services and rewards should help stem the loss of some affluent investors-or at least some of their money-to firms like Charles Schwab Corp. and Fidelity Investments.

Laura Varas, an analyst and president of Mast Hill Consulting, a Massachusetts-based research and financial services consulting firm, says if Merrill "uses staff to play the role of coach/trainer, which is usual among full-service firms, but not yet widely used among discount firms...they could really make an impact." Discount firms' representatives tend to be more focused on a more basic form of customer service.

In a recent report, Chris Brown, an analyst and founder of New Hampshire-based Sway Research, says in recent years, the wirehouses have been "feeding the younger generation to the Fidelitys and Vanguards of the world." To Brown and Varas, such clients typically have $100,000 in investable assets.

In addition to Fidelity and Schwab, Merrill Edge's competition for these investors include Vanguard Group Inc., TD Ameritrade Holding Corp. E*Trade Financial Corp. and even the online platform of another big brokerage, Wells Fargo & Co.

Brown thinks the Merrill Lynch brand and its research and investment products will be an effective lure. Its pricing structure should help it "capture more assets, as clients shift money to Merrill Edge to reach the combined balance needed to achieve preferred pricing."

As clients put more of their money into Merrill accounts, "it should also result in stronger loyalty to the firm," Brown said.

The active trader population might not be so easily swayed. Online brokerages get most of their revenue from this minority of clients, who trade hundreds of times a year and are looking for speed and advanced trading tools. A full-service firm with roughly 15,000 brokers is less likely to invest significantly in these features.

Richard Repetto, equity analyst and principal at Sandler O'Neill + Partners L.P., said in a recent research note he is "skeptical of the impact that the new online offering will have on the pure-play e-brokers."

Repetto recalls a previous attempt by Bank of America to make headway in the sector in October 2006, which he says produced little in the way of success.

Dean Athanasia, head of credit and banking and Merrill Edge in Bank of America's Global Wealth & Investment Management Group, says active traders represent a small segment of the overall trading population. What Merrill is focused on, he says, are relationship-oriented investors. It "wants to help those clients manage their financial lives through their investment and saving needs, credit and banking needs and retirement needs."

Barclays Capital analyst Roger Freeman says if you "look at the e-broker models, E*Trade and TD Ameritrade are trying to build more asset-accumulation offerings-to cater to wealth builders. Charles Schwab, of course already has this. The point of that strategy is to accelerate the transfer [of clients] from wirehouses."

The Merrill Lynch offering, if successful, could effectively counter this effort, at least as far as its own clients go.

A TD Ameritrade spokeswoman said "we know that we provide a comprehensive value proposition for investors of all sizes, needs and investment styles, and our growth over the last two years, in our opinion, validates the strength of that offering."

A Schwab spokesman said clients choose the company as an alternative to traditional Wall Street firms because they don't feel they are getting the services they need there, adding "it's doubtful a limited service model for people with fewer assets will change that or staunch the bleeding."

E*Trade didn't immediately respond to a request for comment.