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Customers Lead Merrill Into the Online China Shop

The firm's execs even used a little new-age wisdom to delineate Merrill's new age.

Over the past 10 years,

Merrill Lynch

(MER)

has shown steadfast determination in building a consumer brand name and looked to models outside of the financial world as examples for its ideal franchise.

Judging by the well-rehearsed press conference chatter at the announcement of its

new online brokerage alternative, the nation's biggest brokerage apparently looked to another consumer success,

Deepak Chopra

, for its latest mission.

Before television cameras and surrounded by the firm's bull logo, Launny Steffens, head of the firm's 14,000-strong broker force, waxed long

and deep

. "Merrill Lynch believes that technology guided by human wisdom continues to be the path by which clients will most effectively achieve their financial goals."

Huh?

If this sounds a little touchy-feely for the visionary and combative Steffens, it's because his glittering career now rides on how well he navigates the balance between the financial-planning approach the firm has built itself on and online trading. And he has to do it without cannibalizing or alienating an expensive and well-trained sales force. Now, it is simply a game of consolidation of assets.

"Merrill figured out distribution

of financial products before anyone else, but I think in this case, they didn't have a choice," says Michael Holland of

Holland Asset Management

, which is long Merrill shares.

The reason? Merrill sees those valuable assets going into other pockets and wants them back. "It appeared foolish to ignore that part of the market, so we decided to attack it," says David Komansky, Merrill's chairman and CEO.

Holland agrees. "To me, they did exactly the right thing. They are survivors."

The move might indeed be the right thing, but the larger question may be whether Merrill can get it right. It likely will not live or die on the strength of its online trading operation, but Merrill now must be able to meld that operation with its longstanding strategy of brokers gathering assets and living large off the recurring fees.

The firm will offer a variety of fee-based accounts that mix online trading with fee-based plans,

Visa

cards, reward programs, e-commerce alternatives and research access. The big change, however, is that it will open an Internet channel that will give clients a basic trading account that includes $29.95 commissions for U.S. equities, online fund purchases and access to cash management and firm research products.

Merrill is hoping that every family gets one -- in addition to their main fee-based account -- stealing valuable assets from online firms such as

E*Trade

TheStreet Recommends

(EGRP)

,

Schwab

(SCH)

,

DLJdirect

(DIR)

and other online brokerages. The $29.95 per trade deal begins in December.

In some cases, clients can use their Visa Signature bonus points to pay for Merrill fees and commissions. The firm, Steffens says, is trying to "reward" clients for consolidating their assets under the firm's umbrella in any number of accounts.

Steffens says Merrill's fee-based Asset Power and Financial Advantage accounts have been growing at a 30% to 35% a year clip during 1998 and 1999. Those numbers, he said, may increase another 15% to 20% on the momentum of consolidating assets into the core account types which include Net trading access.

The online accounts will have to be handled delicately. After Tuesday morning's press conference, Steffens admitted that some of the liability and compliance issues of the online trading component are "not at all clear" and "still need some definition."

And as it embarks on a change that may prove revolutionary, Merrill must ensure that its brokers feel like they are a part of the effort. Merrill brought two brokers to give testimony before the congregation.

Looking more the part of, say,

Patty Hearst

than

Mike Milken

, the pair offered stock sound bites for the crowd. Donna DiIanni, a broker in the firm's Bridgewater, N.J., branch, said Merrill's plans were a "great positive." The other, Peter Rohr from the Philadelphia branch, said the firm's plans would "help clients as well as FCs

financial consultants."

Even Komansky felt compelled to jump in, adding that realistically there are "FCs who will be concerned about it."

At

Prudential Securities

, which rolled out a similar plan about two weeks ago, brokers were concerned that the firm's $29.95 commissions, combined with $100,000 minimum fee-based accounts, would slice into their compensation.

Steffens, who had very publicly denounced online trading of a short-term nature, is trying to provide Net trading without destroying his firm's expensive and well-trained sales force.

"What I find interesting is that Prudential and Merrill are going right to the customer. It's like the customer is dragging the broker around," says Mark Elzweig, a brokerage recruiter in New York. "It's a gutsy move by Merrill."

The world has indeed changed, and Steffens and Merrill realize it. Its brokers will still be rewarded for "relationship accounts," the ones with a fee component, but online trading looms.

"They are looking at the Schwab model and trying to do analogous things," says money manager Holland.