All-in-one accounts centralize an investor's operations

If imitation is the sincerest form of flattery, Merrill Lynch & Co. should feel amply complimented. The big broker's Cash Management Account (CMA) is by far the most successful new financial product introduction in years. It has done so well that Merrill's major competitors, Dean Witter Reynolds; E.F. Hutton; Paine, Webber, Jackson & Curtis; Prudential-Bache; and Shearson/American Express have offered their own versions, with certain refinements and frills.

While so many variations on a theme may confuse prospective customers, the intense competition makes it possible for the individual investor to pick a service most closely tailored to his own needs.

What has attracted all the brokerage houses is a hybrid product that allows customers to switch accounts among three types of money market accounts and the stock and bond markets, as well as offering easy access to the funds by check, charge card, and margin loan.

Competitors may call their programs by other names: at Prudential-Bache it's the Command Account; at Dean Witter it's the Active Assets Account; Shearson/American Express calls it the Financial Management Account; E.F. Hutton terms it the Asset Management Account; and Paine, Webber, the Resource Management Account. But to consumers, so ingrained is the Merrill Lynch CMA identification that the cash management account title has stuck to all accounts, like the trademark Xerox has become affixed to copiers. (Merrill Lynch prefers to refer to all other accounts as central asset accounts, as opposed to its own trademark, Cash Management Account.)

A leading discount broker, Charles Schwab & Co., has its own version of cash management, Schwab One. It has a starting balance of $1,000 cash or $5,000 in securities, no service fee if the balance stays over $10,000, and a money fund sweep.

Despite the entry of big names into the field, no brokerage house has come close to Merrill Lynch's record of signing up 900,000 customers. Dean Witter, the second-largest purveyor of the centralized accounts, boasted only 90,000 at last tally.

The concept for the account actually originated in the mid-1970s, when Merrill Lynch commissioned the Stanford Research Institute (now known as SRI) to undertake a study of what investment customers really wanted to enhance the firm's existing brokerage business.

''The study showed that the securities customers wanted easier access to the money in their accounts and that they wanted their money working all the time,'' a Merrill Lynch spokeswoman explains.

The study led Merrill Lynch to devise a product that allowed customers to switch from stocks and bonds to money market funds and gave them both a Visa debit card and checks with which they could easily draw out funds. That solved the problem of easy access. And, since people wanted their money to be working all the time, the firm devised a method whereby dividends from stocks and interest from bonds as well as all new deposits would be swept automatically into any one of three money funds. Large sums - anything over $1,000 - are swept into the money funds on a daily basis.

Merrill Lynch was ready to test-market the new account by 1977, and its reception proved promising. By 1980 and '81, the concept gained steam as it was rolled out nationwide at a time when high interest rates made the money market aspect more attractive than ever. (It also meant that Merrill's customers were quite profitable for the company, because of the high interest rate the broker collected on margin accounts.)

Such acceptance made competing firms stand up and take notice. By 1981, Dean Witter rolled out its Active Asset Account - trying to take away the lower end of the market from Merrill Lynch by charging a lower annual fee ($30 as opposed to Merrill's $50) and giving faster service in sweeping smaller amounts of money into the money market accounts on a daily basis. Dean Witter's policy is to sweep as little as $1 into the accounts on a daily basis.

Dean Witter also took an innovative approach to tracking the checks that customers wrote on their accounts. While they do not return canceled checks (most central asset accounts don't), the statement sent at the end of the month analyzes and tracks the checks into 20 types of expenses to help customers categorize their business and tax expenses more easily. Pru-Bache and Shearson have a similar system. And, with its ties to Sears, Roebuck, Dean Witter offers customers the privilege of cashing up to $250 at some 850 Sears stores.

While Dean Witter evidently chose to go after the low end of the market, E.F. Hutton, Paine Webber, and Shearson are aiming for the high end. Each of these three brokerage houses charges a $100 annual fee, as opposed to the $30 at Dean Witter and the $50 at Merrill and Bache. For some customers, however, this may pay off, since the firms offer customers credit cards instead of debit cards. Credit cards enable people to charge items for a month before payment is due, thereby using other people's money without interest. Debit cards just remove funds from one's own account. For someone who racks up very high charge bills, say more than $20,000 per year, the extra charge may be offset by the money earned on keeping money in the money market account and using a charge card.

The debit card draws money out of the account in a highly specific way. ''There is a specific order in which these funds are drawn down,'' the Merrill Lynch spokeswoman explains. ''The first amount comes out of any money that is waiting to be swept into an account and is therefore lying idle. Then funds come out of the money fund. Last, the money is drawn from the customer's margin account.''

This is where the brokerage can make real money. Brokerage accounts are charged from 3/4 percent to 21/4 percent over the broker loan rate on such margin loans - depending on the size of the loan. The larger the sum borrowed, the lower the spread.

For the discriminating consumer, centralized management accounts exhibit other discrepancies that may also be deemed important. Take the issue of insurance. Dean Witter and Paine, Webber insure securities in accounts up to $ 500,000. Merrill Lynch and Prudential-Bache go one better and carry Securities Investor Protection Corporation (SIPC) insurance on up to $10 million worth of securities. And Shearson carries insurance on $10 million in cash and securities. Hutton, on the other hand, carries no insurance at all on the account.

Another issue is the way brokers return canceled checks written on the accounts. Most brokers don't provide canceled checks at all - with the exception of Paine, Webber and Hutton, which provide them and don't charge anything for the service. All the others provide a monthly statement without the checks. The brokers explain that back checks can be obtained on request for up to seven years after they are written (61/2 in the case of Shearson/American Express). But two brokers - Prudential-Bache and Shearson - charge a fee for sending out back canceled checks. Prudential-Bache asks $2 per check and Shearson charges $ 1.25 each.

Although charges may not seem a burden, they can add up. For example, a real estate investor who had written checks for improvements on some state-subsidized real estate was asked by the Internal Revenue Service to account of each of these expenses with canceled checks. Obtaining the required blizzard of paper cost him over $300.

Finally, consumers should not be scared off by the high sum required to start a centralized management account. While most firms ask customers to initiate the account with $20,000 in cash or securities, none require much of a balance. In fact no minimum balance is required at Dean Witter, Merrill Lynch, Prudential-Bache, or Shearson. Paine, Webber and E.F. Hutton, which do have minimum requirements, have smaller initial deposits. At Paine, Webber, customers are required to have 5,000 in cash or securities to begin with, and must maintain a $10,000 balance. And at Hutton, customers must open the account with that falls below $5,000 for two months can be canceled.