The Week in Review -- June 4, 1999

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DJIA 10,631.80 10,799.84 +168.04 +1.58
S&P 500 1,301.85 1,327.75 +25.90 +1.99
Nasdaq 2,470.41 2,478.34 +7.93 +0.32

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Merrill Lynch Is Doomed
by Jerry Thomas (

What inevitably happens to a business that puts its sales force at direct odds with its customer base?
--David Gardner, Fool

Greetings, Fools.

There are few things so remarkable as a magnificent capitulation. Bless Merrill Lynch & Co. (NYSE: MER) for providing that spectacle early this week when it announced its plans to offer online trading for its clients. That sound you hear, Fools, is a cry of angst from some 14,000 Merrill Lynch brokers who are about to find it incrementally more difficult to collect their juicy full-service commissions. The anguish of these brokers is hardly misplaced, considering that their entire profession is, every day, looking more and more like an anachronism. As Fool David Gardner suggests in Tuesday's Rule Breaker report, the profit margins of the transactional financial services industry are slouching, inevitably, toward zero. Hallelujah.

Rejoice, Fool. Merrill has seen the light. It was only seven months ago that Merrill Vice Chairman John Steffens rang the alarm against the peril of buying stocks online for low commissions. "The do-it-yourself model of investing, centered on Internet trading, should be regarded as a serious threat to Americans' financial lives," he warned. Translation: You, the people of America, are simply too ignorant, too trigger-happy, too prone to bouts of crazed hysteria, to manage your own money. Here, let us hold it for you.

The cowboys of the Old West flourished in the second half of the 19th century. Their way of life was dispatched from the realms of usefulness by a simple innovation: barbed wire. There was once a whole industry devoted to delivering large blocks of ice to people door-to-door. Then came the age of refrigeration. When sound amplification fell into the hands of the people, the Big Band era gave way to Rock and Roll. Each of these ancient professions had its own iconic practitioner, and each of them surrendered to the ages when their usefulness was spent. Good-bye, full-service broker. Hello, Internet.

In our Fool Community you'll find a message board called Eyes on the Wise, which is devoted to holding the Wall Street Establishment accountable for the many indiscretions it commits in the name of prudence and Wisdom. Sadly, Merrill stands out in that discussion as singularly clueless. Among the recent transgressions reported you will find:

  • A Salomon Smith Barney report that touts as a competitive advantage Merrill's predilection for confusing its customers with complex fee schedules. (Post #868)
  • A surprisingly insensitive reference to women in a Merrill television advertisement -- a particularly egregious gaffe considering the recent class-action gender discrimination suit against the company. (Post #925)
  • Recent reports of a Merrill broker who generated some $3 million in commissions in one quarter, despite the company's repeated admonitions against overtrading. (Post #919)
And then there's Merrill's role in last year's Long Term Capital Management hedge fund debacle. (Fools may feel free to shudder at the thought.) These gaffes and blunders all add up to -- at the very least -- the appearance of an institution, and an industry, steeped in a culture of arrogance. I needn't parse out the inherent conflicts of interest that give rise to such hubris. You can find those explanations elsewhere in Fooldom. Instead, for now, let's applaud Merrill Lynch for taking one baby-step toward reducing its fees, and toward surrendering greater control of its clients' money to those who have the greatest interest in outstanding performance: the customers themselves. The step is an indication that Merrill is beginning to move with the flow of history rather than against it, and we should encourage them to continue. Without such reforms, Merrill Lynch is doomed.

On the whole, it was a vintage week for watching the Wise. Last Saturday's cover story in Barron's magazine trashed Jeff Bezos and (Nasdaq: AMZN), and the stock price genuflected before this hoary font of Wisdom. It's funny what passes for analysis in today's financial press, and in back-to-back Fool on the Hill commentaries (Wednesday and Thursday), Fools Louis Corrigan (TMF Seymor) and Dale Wettlaufer (TMF Ralegh) exposed the shallowness of the Barron's assault. If you are at all interested in the mysteries of Internet valuation, these twin contributions are a good place to begin. David Gardner's Tuesday Rule Breaker report, linked above, also reacts to the Barron's piece.

I also want to make note of a couple of stand-outs this week -- first, there's the latest Fribble from Selena Maranjian (TMF Selena), who offers a garland of reasons to get involved in the discussions on our Fool Message Boards. Then there's our Save the Planet contest, where Fools everywhere are examining just what went wrong with Planet Hollywood (NYSE: PHL), and exploring ways to make it right again.

Finally, you know what? It's my anniversary. That's right -- a year ago this weekend, the first of these weekly Notes appeared. I'll save the celebration for next week, though.

Until then, Fool on!


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