May 25, 2022

Article 8.8


June 2, 1999 was a big day on Wall Street. Merrill Lynch decided to offer a $29.95 broker-less, online trading fee ONLY two years after the start of the online brokerage revolution. After 20+ online firms and three full-service firms have already captured over 4.5 million on-line accounts containing over $400 billion in assets, Merrill has announced a service that cuts out the stockbroker around whom the firmís entire culture and vast, real estate office overhead has been built.

The announcement suggested on-going indecisiveness. Merrillís stockbrokers received no advanced warning, the service will not be ready until "December" and the final unbundled fees for access to research still seemed uncertain. Perhaps the announcement was rushed to steal thunder from E-Tradeís same-day announcement that they were buying an Internet bank for $1.8 billion in E-Trade stock.

What contrasting strategies! E-Trade, a three-year old startup, is continuing to attack the future by empowering online investors with a boldly expanding, one-stop, global, financial offering. Merrill continues, instead, to protect the past and to ignore investorsí internet-stimulated, expanding expectations.

What will happen now that Merrill has thrown in the cyber-towel? The rest of the full-service firms will have to follow with unbundled prices that we can expect to go lower. The average Internet broker charges about $15 per trade. How much more will people pay for Merrillís unbundled research when much of it is really marketing propaganda for underwriting clients and the rest escapes and gets re-purposed for free on other sites?

How many of the 11 million investors that currently use online services for investment research, but have not yet done their first online trade will be encouraged to do their own trades? How will they judge the unbundled value/cost proposition for a brokerís advice every time that they consider a trade? The best advisors will still be valued, but for what eroding, unbundled fee? The rest, who have been pushing "special opportunities" that come from their firmís underwriting department, could have more trouble.

Press pundits immediately forecasted big declines in both full-service broker income and head counts over the next 2 to 5 years. Merrillís stock also tanked, as investors correctly assumed that the firm couldn't offer both big discounts and "guaranteed" income levels for their commission-based sales force without effecting earnings. No wonder Merrill has been paralyzed for two years while contemplating the unraveling and potential collapse of their traditional business model.

What should managers in distribution channels conclude? When will some distributor, for example, start a new, "e-value" web site featuring cost+ pricing to target buyers that want to buy commodities for the lowest prices in the quickest time on a 24x7 convenience basis. At first, perhaps only a few customers will bite, but the rest will log on quickly to see the lower prices and start to wonder if bundled sales force coverage is worth the extra cost. Who will play to win in the digital networked channel? Who will delay and lose?

Itís time to do some honest, activity based costing analysis for all field sales forces and project what will happen in a transparent cost channel. Some activities will still be sufficiently valued by either suppliers or customers and survive under a new compensation scheme. Just in case, maintenance calls on established accounts will, however, be downsized sensationally. And, new problem-solving chores will emerge that will be taken care of in new ways. For a constant volume throughput for a channel or a distributor, there will be significantly fewer, better, re-skilled and re-compensated sales reps. Are channel managers ready for this transformational coaching challenge?

Merrifield Consulting Group, Inc. Article # 8.8