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With Merrill Lynch's New Online Division, Look for a High-End Row

The company goes toe-to-toe with discount brokers Schwab and E*Trade, who have been courting clients with enhanced service for a while.

Merrill Lynch's

(MER)

move into discount brokerage territory doesn't mean that online firms are suddenly going to add mutual funds or fixed-income investments to their Web sites. The firms that want them already have them.

Brokers that aim for the lower end of the market -- such as

Datek Online

or

Fleet Financial's

(FLT) - Get FleetCor Technologies, Inc. Report

Suretrade

-- aren't interested in Merrill's high-end market. They prefer to focus on trading and let customers do their heavy research elsewhere.

The real battle with Merrill will involve

Schwab

(SCH)

and

E*Trade

(EGRP)

, online firms that began climbing towards high-end status long before Merrill officially

announced Tuesday it was heading for their territory.

"Schwab has been moving into the advice space since day one," says James Punishill, an analyst for Boston-based consulting firm

Forrester Research

. "Schwab is pretty confident it is going to stack up quite well." Both Schwab and Merrill are Forrester clients.

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Merrill's decision to allow investors to trade online is clearly aimed at challenging the tonier firms, and in particular Schwab, which has more than 2.5 million online accounts and numerous proprietary and third-party products and services including mutual funds, fixed-income and equity trading, underwriting and financial advisers.

"On the per-trade price point,

Merrill selected $29.95, which is Schwab's price," points out Stephen Franco, an analyst at

U.S. Bancorp Piper Jaffray

. Piper hasn't performed underwriting for Merrill or Schwab.

Schwab doesn't seem to mind. The firm, which was an established discount broker before it started bringing accounts online a few years ago, has long tried to pit itself against full-service firms. It asked to be ranked against them instead of the discounters in

SmartMoney's

annual broker survey.

"Schwab's been trying to move up to their level, and now Merrill is moving down to their level," says Greg Smith, an analyst at

Putnam Lovell de Guardiola & Thornton.

While Schwab has so far laid out what it means to be at the top of the online brokerages, it's clear that Merrill will change that.

"

Merrill is going to define the upper end of the market," Franco explains, pointing to its trade-as-much-as-you-want account. This fee-based account, which charges a percentage of assets with a minimum fee of $1,500, allows online investors to make as many trades as they want. Merrill introduced online trading for some fee-based accounts earlier this year along with some other full-service brokerages, but the minimum fee account with unlimited trades is new online. It will start in July.

But that doesn't mean that Schwab will start offering a similar fee-based account, Franco adds.

And Schwab says it has its own plans afoot. "We established what we called our redefinition of a full-service brokerage last year and what it did was create a platform for a lot of initiatives from Schwab," says spokeswoman Tracey Gordon. "There are a lot of things in the pipeline, and we're not going to be dissuaded from our task."

For example, Schwab launched new services for high-net-worth and active investors, she says, which include research, investment tools, adviser access and cash-management services. The company offers all clients mutual funds, equities, options and fixed-income assets as well as educational tools.

If Merrill moved toward Schwab and E*Trade Monday, E*Trade took a jump toward high-end service when it announced a $1.8 billion takeover of online bank

Telebanc Financial

(TBFC)

. That deal will give it the ability to offer online banking, including the cash management services that Merrill has on its list.

But E*Trade is ahead on some counts. Merrill Vice Chairman John Steffens made much of his firm's plans for an e-commerce service that will allow customers to buy discounted goods from other Web sites. E*Trade introduced its shopping center last year.

"I really question their ability to put out a product like E*Trade right out of the chute," Piper Jaffray's Franco says.