Big Brokers Struggle for a New Identity

All it the revenge of the common investor.

After years of unreturned phone calls, high fees, and other slights by full service brokerage houses, small investors are finally getting their due. Large brokerages have recently come knocking, hat in hand.

For several years, small investors emboldened by a glut of new investment information have bypassed large brokerages. Since 1990 they have boosted total mutual fund assets more than threefold to $3.9 trillion in one of the most spectacular runs to an investment vehicle this century, according to the Investment Company Institute, a mutual fund trade group in Washington.

But just a small portion of that money has gone to the companies that once ruled the investment kingdom.

"The entire financial world has been amazed at the growth of mutual funds over the past decade," says Mendel Melzer, chief investment officer of Prudential Mutual Fund in Newark, N.J.

In an effort to ride this flood of money, full service brokerages are now offering an expanded range of their own mutual funds and the promise of broad financial planning as well as investment advice. But their strategy might offer too little, too late, say investment advisers.

"There has been a fundamental paradigm shift in financial management away from big institutions and toward the small investor," says Kurt Brouwer of the money management firm of Brouwer & Janachowski in Tiburon, Calif.

The initiative by large brokerages comes at a time of both opportunity and adversity. Their revenues have exploded during the bull market of the past seven years.

Meanwhile, though, the brokerages have been harried from below by self-reliant small investors and from above by banks steadily encroaching on their realm of investment management.

"Brokerages are being badly squeezed between banks and individual investors," says John Markese, president of the American Association of Individual Investors in Chicago

The brokerages seek to provide the broad and deep services neglected by many major mutual funds. They promise broad financial advice on everything from planning for college education to retirement. They have especially targeted investors lacking the knack or desire to winnow the bewildering array of investment options.

The Merrill Lynch Global Allocation Fund (800-637-3863), that makes life easy for investors by investing in both bonds and stocks of companies from all over the world. With solid gains, it is praised by analysts such as the Value Line Mutual Fund Survey.

Merrill is the No. 1 brokerage firm, with $165 billion in fund assets under management. On its heels are Smith Barney (800-544-7835) at $78 billion, Dean Witter (800-869-6397) at $71 billion with its InterCapital funds, Prudential (800-225-1852) $46 billion, and Morgan Stanley (800-548-7786), at $46 billion including its Van Kampen American Capital funds.

Those asset totals, from Dalbar Inc. in Boston, exclude variable annuity funds, a form of insurance, as well as closed-end funds, a Morgan Stanley specialty.

All these brokers offer a diverse array of bond and stock funds: 70 at Smith Barney 150 at Merrill.

Many of the brokerages also dangle the prospect of in-house funds that invest in the brokerage's own Initial Public Offerings. Such opportunities occasionally generate swift and impressive returns.

As big brokerages try to woo the common investor, they must disguise some blemishes. First, the funds tend not to perform as well as those of many leading mutual funds, says Mr. Markese.

Second, and most glaring, the brokerages generally charge higher fees and other expenses than the industry average. The charges ostensibly pay for the financial management and advice.

Brokerages seek to differentiate themselves from low- or no-load mutual fund companies and are leery about comparisons with their lower-cost rivals. Indeed, over a period of six days only one of six brokerages contacted for this article agreed to an interview.

Rather than offer its investors a "supermarket" of funds as Fidelity, Charles Schwab, and other rivals do, Prudential features what it calls a "gourmet" shop of about 200 diverse funds, including its own. Like other major brokerages, Prudential fields "financial advisers" - "broker" has apparently lost appeal. "Financial counselor" is also a popular tag.

"Those people who are into a totally do-it-yourself approach will gravitate toward no-load funds," says Melzer. "But you should think of investing as you would writing up a legal document: You can go to the library and research and write it yourself, or you can go to an attorney and have it done by a professional."