Charles Schwab rebuilt itself as an "Internet" stock. Merrill Lynch stayed true to its distribution channel, decrying the Web as a medium that causes excessive trading and client losses in a now infamous Wall Street Journal
article. Schwab has a market cap of $42 billion. Merrill's market cap is roughly $30 billion.
If there is anything that Merrill knows it is how to listen to the market. Thus, today's announcement that Merrill has tapped a Web-based start-up to provide investment advice to its 401(k) and qualified plan clients perhaps should not be such a surprise. The trick for the nation's largest brokerage firm (in customers if not in market cap), is how to integrate the Web without destroying its financial consultants' (FCs) business.
In case you missed it, Merrill is allying with Palo Alto-based Financial Engines to provide investment advice to its 401(k) clients. The fifty employee, venture capital-backed start-up is the two-year-old brain child of Nobel Leaureate William Sharpe and former SEC Commish Joe Grundfest. Both are professors at Stanford's Graduate School of Business.
This isn't all of the news coming out of Merrill's Princeton offices, however. Tying in Financial Engines is just a part of a broader overhaul of Merrill's investment consulting services. Merrill is betting that by offering a spectrum of investment advisory services it will complement its existing services. The FCs will be able to focus on the more touchy-feely task of wealth management while futuristic tools perform the analytic task of allocating assets.
A spokesperson confirmed that Merrill is planning on rolling out custom solutions for higher net worth participants either later this year or early next year.
One program called Mutual Fund Advisor
will allow clients with a minimum account of $10,000 to work directly with a financial consultant or money manager to find their best solution.
Clients with at least $100,000 will be offered a service dubbed Merrill Lynch Consultants
which will provide them the services of Merrill Lynch Asset management or of independent advisors. These services will work like a wrap account with clients paying an asset-based
Merrill is not alone in facing this dilemma of integrating the direct sales model of the Web with an existing network of intermediaries. Last month, the failure to solve this problem cost Compaq CEO Eckerd Pfeiffer his job.
By choosing its 401(k) product to roll out this services, Merrill has chosen a safe area in which its FCs have played a limited role. It is also an area in which it deals with many more small
accounts than in its other businesses.
This is one way to solve the FCs headache of small account holders in a 401(k) plans from constantly calling
to get advice. On the downside, it runs the risk of training younger participants to use software rather than a person for advice. Eventually, these younger participants will grow older, accumulate larger balances, and form the basis of the investment advisory business.
Still, the fact that more 401(k) vendors are offering Web-based advice is causing other firms to take the issue seriously. Last Fall, State Street Global Advisors also entered into an
alliance with Financial Engines, although it is only offering a phone-based version of the service. Other firms, such as Scudder Kemper, New York Life, Invesco, and Putnam Investments are rumored to be close to making a decision on a Web advisory solution.
Also today Credit Suisse Asset Management/Warburg Pincus announced its own alliance with 401k
Forum to provide investment recommendations for its 401(k) plan clients.
Other advice players include: The 401k Forum
unit of Emergent Advisors, Rational Investors
, which has a marketing relationship with Standard & Poor's, and a host of smaller startups.
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