October 1, 1998

Merrill Lynch: The Big Bad Wolf
By Yi-Hsin Chang (TMF Puck)

Once there was a Foolish investor known to all as Little Red Riding Hood. One day her mother said: "Little Red Riding Hood, here's $5,000 and some fresh-cut flowers. Take them and go see your grandmother. She's been using The Motley Fool website, and she'll show you how to set up an online trading account and how to start investing in the stock market via the Internet."

"I'll do everything right," promised the budding red-capped investor. Her grandmother lived in the woods, half an hour's walk away. No sooner had Little Red Riding Hood set foot in the woods than she met the wolf -- the Big Bad Wolf from Merrill Lynch, John Steffens. But Little Red Riding Hood didn't know what a wicked beast he was, so she wasn't afraid of him.

"Good morning, Little Red Riding Hood," the wolf said. "Where are you going?"

"To my grandmother's," she answered. "I'm going to learn how to trade stocks on the Internet."

"Little Red Riding Hood, don't you know the dangers of executing trades online without the help of a full-priced, I mean, full-service broker?" he asked. "The do-it-yourself model of investing, centered on Internet trading, should be regarded as a serious threat to Americans' financial lives."

"Hmmm, I don't know what you're talking about," said Little Red Riding Hood. "Thinking for yourself and investing for yourself sound like great ideas to me."

"But don't you see, discount online trading makes it too easy for investors to buy and sell stocks. It's like gambling. It encourages investors to trade too much at the expense of long-term returns. That's why we have such high fees, to keep people from over-trading."

"With all due respect, Mr. Big Bad Wolf, what you say makes no sense. I wouldn't gamble on my investments on or offline -- I'm not gonna be some day-trader. It seems to me that high commissions at full-priced brokerages are really what's eating away at long-term returns."

"Well, in any event," Steffens stammered, handing her a snazzy, glossy booklet. "Take a look at our latest annual report. Look at the nice charts and pictures."

As Little Red Riding Hood flipped through the pages of Merrill's annual report, the wolf sneaked off to her grandmother's house and knocked on the door.

"Who's there?" asked Grandma.

"Grandma, it's Little Red Riding Hood. Mother sent me to learn about investing."

"Just raise the latch, dear," said Grandma. "I'm in the middle of making a trade."

The wolf raised the latch, and the door swung open. Without saying another word, he charged straight into the house toward where Grandma was sitting in front of her computer and gobbled her up. Then he put on her "Be Foolish!" T-shirt and Fool cap, and sat down in her chair.

Meanwhile, Little Red Riding Hood had read through Merrill's annual report. She was scratching her head, trying to figure out how the company's stock price had lost more than half its value in under three months. Suddenly, she remembered her task and started off again toward her grandmother's house.

When she arrived, she was surprised to find the door open, and when she stepped into the house, she had a strange feeling. "Hello," she called out. "Grandma? Where are you?"

"Over here, by the computer."

Little Red Riding Hood walked over to the computer and handed her grandmother the bouquet of flowers. But what occurred to her was: My, how strange Grandma looked.

"Grandma, what complicated charts you have!"

"The better to confuse you, my dear."

"Grandma, what a pretentious demeanor you have!"

"The better to advise you, my dear."

"Grandma, what large fees you have!"

"The better to eat away your profits, my dear!"

And with that the wolf leapt from behind the computer and gobbled up poor Little Red Riding Hood. Right around this time, a Fool donning a jester cap was passing by and heard the commotion. He stepped into the house and confronted the Big Bad Wolf. "You old crook!" the Fool said. "How many investors have you tricked this time?"

"Ah, you again, Motley Fool!" cried the Big Bad Wolf. "You're the one who's been filling people's heads with ideas of financial independence -- how to value stocks, how to research stocks, how to invest in stocks, how to buy a car or house, how to pay for college, how to plan for retirement. You encourage investors to use discount brokers!"

"Guilty as charged!" the Fool said proudly. "Low commissions are very Foolish."

"You're encouraging frequent trading!"

"Au contraire, my dear Wolfie. Long-term investing is one of the key tenets of Foolish investing. Besides, Merrill Lynch doesn't discourage frequent trades -- your brokers are paid based on the number of trades they execute, not on how well their clients do on their advice. The only reason your clients don't trade more is because they can't afford it! And you bad-mouth online trading even though you yourself are planning to offer your own full-priced version."

With that, the Fool drew his sword and slashed the wolf's belly open. Little Red Riding Hood jumped out, followed by her grandmother. "You really are a Big Bad Wolf," the girl said to Steffens. The little red-capped investor suggested filling the wolf's belly with big stones and throwing him in the nearby river, but the Fool had a better idea.

"Grandma, if you have a sewing kit handy, let's sew this puppy up and let him live out his miserable existence in fear of losing business to discount brokers, in fear that individual investors can do just fine without Merrill Lynch."


What do you think about John Steffens' comments? Do you think discount online trading is like gambling? What has been your experience with discount and full-service brokers? Share your thoughts on the Features message board.

Related links:
-- Merrill Pros Lose to Individuals: Open Letter to Merrill
-- John Steffens' comments at PC Expo (6/17/98)
-- 13 Steps to Investing Foolishly
-- Buy-and-Hold Beats Rapid Trading
-- The Buy and Hold Apocalypse