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Merrill's Move Is the Beginning of the End for Loads and Commissions

The trend is toward fee-based services. And lower fees at that.

The traditional investing world is being turned upside down.

Consumers have been challenging the old way of doing business, first by using discount brokers like

Charles Schwab


and then by using the Internet to research information and make their own trades online.

Like the great societal changes that sprang from the 1960s, this great techno-revolution of the '90s has turned into a runaway freight train. Stand in front of it, and you'll get blipped.

To survive, smart companies will have to get on board and position themselves to add value. That is why

Merrill Lynch


made headlines by

announcing online trading for as little as $29.95 per trade.

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Mutual fund companies that distribute and sell through intermediaries such as brokers and financial planners are going to be forced to go back to their drawing boards as well. Right or wrong, the reality is that loads, 12b-1 fees and commissions have become dirty words to a lot of people.

The huge question facing companies that sell load funds is whether they will allow their funds to be sold directly to investors over the Internet without a sales charge. My guess is that at some point, they will have to acquiesce or suffer market loss. Most of the load companies have already taken the first step. They allow advisers to invest clients' money in their funds without the load through fee-based asset management programs.

My take on this is that as soon as marketing strategists for these fund companies project sufficient profits through the Internet, they will open up their funds on a no-load basis via the Internet and essentially compete with their own brokers.

Does that mean brokers, advisers and financial planners who work on commissions won't make it? Some will and some won't. At the very least, they will have to intelligently position themselves for the particular market segment they serve. The sea change in adviser compensation is toward charging fees and away from taking commissions. And the trend is toward even lower fees. A 2% to 3% portfolio management fee on top of annual fund expenses -- not uncommon for brokerage houses' asset management programs -- won't last.

Many full-service firms already have a fee-based asset management program. The problem for the commission-based broker is how to cross the bridge from commissions to fees. Successful brokers make good money on commissions. If they transition to the fee program, their compensation will immediately go down. It may take three years or more for a broker to build up enough in fees to equal current income from commissions. This is forcing brokers to be schizophrenic. On the one hand, some are gradually building up the fee part with some of their clients while charging commissions with others.

A creative full-service brokerage firm will figure out a way to help their brokers to cross that bridge, unless those brokers are considered dispensable to this new era of Internet marketing.

So what does all this mean regarding the way you will make your investments? I suspect investors will be able to choose from at least four alternatives:

  • Some will choose to only use the resources of the Internet to invest.
  • Some may use both the Internet and an adviser to facilitate investment strategies. These people want to do part of it themselves but also want somebody to manage part of their money on a fee basis. They also want an adviser to help them create an overall investment strategy and help implement it. It may be important to have a professional available when there are problems, like a market correction, as well.
  • Some will want to work with a full-service adviser who will manage their money on a reasonable fee basis. The adviser will provide monthly statements and quarterly performance reports and have periodic face-to-face meetings.
  • Some may still want to continue investing through an adviser/broker on a commission basis. This old-fashioned way has worked for a long time, and it won't go away entirely. But at least it is not like it was 30 years ago when mutual funds were sold door-to-door with an 8.5% load.

Regardless of the investment path you choose, it will always be important to have a total financial game plan. It becomes the all-important frame of reference for you to make critical decisions and achieve your goals. That is why financial planning as a profession is growing so rapidly.

I welcome your thoughts on what is going on in the industry. As always, I greatly appreciate your email. Have a great week!

Vern Hayden is a certified financial planner in Westport, Conn. He is a financial consultant and advisory associate of Financial Network Investment Corp. He also is an owner of Hayden Financial Group. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at