9/24/98

The Fool Responds to Merrill Lynch

The Motley Fool Says Online Trading Is Bad for Merrill Lynch

ALEXANDRIA, VA (Sept. 24, 1998) /FOOLWIRE/ -- The following statement was issued today by The Motley Fool:

In Wednesday's issue of the The Wall Street Journal Merrill Lynch Vice Chairman John Steffens is quoted as saying, "The do-it-yourself model of investing, centered on Internet trading, should be regarded as a serious threat to Americans' financial lives." He goes on to state that the Internet encourages people to trade too frequently.

It's nice to see that Merrill is so concerned with the welfare of the American public, and there's no question that locking in on frequent trading as a problem is something worth the attention.

We wonder, then, why most of Merrill Lynch's mutual funds insist on such high turnover rates. A quick look at the domestic equity funds run by Merrill reveals that the average turnover for the funds is 60-70%.

We understand why Mr. Steffens is resorting to these scare tactics. If you convince people that trading online will instantly transform conservative investors into day-trading maniacs, then there's a much greater chance that they'll come running back into the arms of high-fee brokers.

Only it doesn't work that way.

The ability to execute one's own trade over the Internet does not turn Dr. Jekyll into Mr. Hyde. A person's tolerance for risk does not drastically change once he or she gets online. Mr. Steffens may be surprised to hear it, but trading too frequently was a problem long before the Internet came into play. The "full-service" brokerage industry can claim credit for that.

In the last five years the Internet has radically leveled the playing field for the do-it-yourselfers Mr. Steffens insults. Trading costs have dropped to virtually nothing, once-expensive information is now free, and individuals from all over the world can share information.

The latest issue of Barron's reports that over the last three years Merrill Lynch's professional fund managers have produced exactly zero funds that have beaten the market's average return. Once investors realize they can buy a simple index fund with drastically lower fees and beat the John Steffens of the world, what will that mean for Merrill Lynch?

In short, we believe that online trading is not bad for investors, but rather for Merrill Lynch.

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