Index Funds Considered By Merrill --- Big Brokerage Firm May Target Certain Investors During
NEW YORK -- Merrill Lynch & Co. is pondering a move that would rankle the brokerage industry: the nation's largest securities firm is thinking of starting to offer its own "index funds" to small investors sometime next year.</br></br>Merrill officials caution that the firm hasn't decided whether to take this course with index funds, which are structured to mirror the performance of popular stock-market benchmarks, such as the Standard & Poor's 500. Index funds, which simply try to match the market rather than beat it, run counter to the brokerage-firm thinking that fund investors crave active money management to protect their savings amid market slumps.</br></br>But people with knowledge of Merrill's intentions say the big brokerage house's asset-management subsidiary, Merrill Lynch Asset Management, is considering the launch of several index-funds to its "wrap-account" customers in 1997. The possibility was described in a recent internal memo on how the asset-management unit can increase its business in the year ahead, people with knowledge of the move say.</br></br>Brokerage-house wrap accounts are so called because all the fees are wrapped into one levy, typically 1% to 3% of assets every year. By charging such fees, a brokerage house might seem to be undermining a major draw for investors in index funds, namely, that their costs are extremely low. But there's no doubt that index funds have been much in demand recently. The nation's second-largest mutual-fund company, Vanguard Group of Valley Forge, Pa., has been selling index funds like hotcakes and beating a lot of the actively managed competition in performance this year.</br></br>"It represents a real sea change in the industry's attitude toward index products" for Merrill even to consider such a move, says Burton Greenwald, a Philadelphia mutual-fund consultant. "Everyone has been reluctant to push them. If Merrill Lynch, given its sheer size, will offer them, others are likely to follow."