MERRILL: SCHWAB JAB A SHOT IN THE DARK; SAYS DISCOUNTER LIED ABOUT MERRILL’S HOT NEW ACCOUNT

Bored because the presidential campaign hasn’t gotten dirty yet? Don’t fret. The brokerage industry can teach politicians a thing or two about slinging mud.

At Charles Schwab Corp.’s conference for 1,300 financial advisers last week in San Francisco, an executive of the nation’s No. 1 discounter roasted Merrill Lynch & Co. Inc.’s popular new fee-based brokerage account, Unlimited Advantage. As part of a broad discussion of Merrill’s program, Daniel Leemon, Schwab’s chief strategy officer, drew a gasp from the audience when — citing Schwab’s own detective work — he characterized the account as a charade.

“The account cannot be closed and transferred out without liquidating everything,” Mr. Leemon said. “This is not something that’s part of the pitch to the client on the way in, based on the mystery shopping that we’ve been doing. So ‘Unlimited Advantage to whom?,’ I think, is the obvious question that comes out of that.”

What shocked the audience was that customers would be forced to sell securities they might not be ready to sell. Not to mention the likely capital-gains tax hit. Trouble is, Merrill Lynch might say Schwab’s detective work was done by Inspector Clouseau.

“What they’re saying at their conference is lies. Quote me,” barks Susan Thompson, spokeswoman for Merrill.

Merrill officials say customers can close out their account and transfer the securities to another brokerage without having to liquidate their assets. But they do have to liquidate securities if they want to make piecemeal transfers out of Merrill.

“It’s been a conference of lies,” continues Ms. Thompson. “They are so rotted in their own cage because we’ve got $16 billion in this new account. They are playing a smoke-and-mirrors game to take the consumer’s eyes off the ball. The best they can come up with is to attack a competitor.”

Clients of Unlimited Advantage, launched in July, are charged an asset-based fee and can trade as much as they want without paying further commissions. Interviewed prior to the conference about the terms of the account, Paul Gottlieb, private client counsel for Merrill Lynch, said clients can transfer securities by closing the account. “While you’re in Unlimited Advantage, if we’re charging an asset-based fee, we can’t let them transfer everything out or there would be nothing to charge for the unlimited trading,” he said.

Schwab spokesman Glen Mathison insists the flap is much ado about nothing. “This Merrill Lynch part is like five minutes of an hour-long speech,” he says. “It’s just one tiny illustration of a broader point we were trying to make, which was that full-commission brokerage firms are attempting to copy our successful model, and consumers need to dig below the surface to make sure what they’re getting.” He would not comment on Schwab’s “mystery shopping” at Merrill Lynch.

Regardless of whose side you’re on, Schwab’s tough tactics amount to an admission that it’s vulnerable. “Today they don’t have the superior value proposition,” says Sanford C. Bernstein & Co. senior analyst Steven Galbraith.

Many full-service brokers have met Schwab’s $29.95 monthly trading charge, and they offer their own research reports as part of the bargain. “I would actually argue that Merrill Lynch and Morgan Stanley offer superior value,” Mr. Galbraith says.