The account that combined - then changed - financial services

It began basically as a margin account, but ended up revolutionizing the financial services industry and forcing brokerages and banks to meet their clients' needs more precisely. Last week Merrill Lynch & Co. celebrated the 10th anniversary of its Cash Management Account. CMA joined a brokerage margin account (where customers borrow part of the money to buy stocks) to a credit card, checks, and the automatic movement of ``idle'' cash into a money market fund. The account consolidates assets and keeps a customer's money working.

``From a customer's point of view, CMA is probably the best innovative product to come down the pike,'' observes veteran Wall Street analyst Perrin Long, of Lipper Analytical Services.

CMA is as close to a major innovation in financial services as has been seen in this century, adds John Bachmann, managing partner of Edward D. Jones & Co. in St. Louis. ``It was a response to an economic reality: The cost of money had become so high it no longer made sense to put it into noninterest-bearing accounts. The banks were unable to offer these accounts, because of the regulatory structure, and nature abhors a vacuum.''

Other brokerages, banks, and mutual funds have offered similar consolidated or central assets accounts, with different initial investments and services, but none of them have been as successful. Merrill Lynch has 1.3 million CMA accounts, with assets of $160 billion. Its nearest competitors - Dean Witter Reynolds and E.F. Hutton - each have about 170,000 accounts.

CMA debuted while Donald T. Regan - later to serve as Treasury secretary and White House chief of staff - was chairman of Merrill Lynch, and at a time when interest rates were low, not the best time to be investing in money market funds. A $20,000 minimum deposit was required to open the account. Also, the seemingly radical concept of the account did not immediately win converts.

``Wall Street had to be convinced of CMA before it could be sold,'' says Jim Settel, director of product development and implementation, and director of corporate training, at Prudential-Bache Securities Inc.

``CMA didn't work when interest rates were low, because the sweep mechanism didn't work, but when interest rates rose, CMA took off,'' he adds. In the early 1980s banks were paying 5 percent interest, and CMA money fund rates averaged 12 percent.

Perhaps the account's most novel feature was the sweep of unused money into money market funds. ``The CMA concept gave people a nonintrusive capability of having money work for them automatically when they weren't using it,'' says Mr. Settel, who was responsible for developing Pru-Bache's competing Command Account program, which was launched in February 1982 and today has 145,000 accounts.

``The concept revolutionized the way we do business,'' notes Matthew Ogiba, director of Command Account marketing. ``It helps the account executives help the clients' total planning and gives a better picture of what a client needs.''

In 1981 and '82 PaineWebber Inc. was designing its competing account. ``CMA had become for Merrill a marketing tool, and our clients wanted it,'' explains Nancy Anderson, product manager of specialized programs. PaineWebber has more than 80,000 Resource Management Accounts, she says.

PaineWebber took a segmented approach in developing its account, Ms. Anderson explains. ``We had a little more perspective and found that all of those things the first CMA offered don't appeal to everyone,'' she observes.

The consolidated accounts have created a new financial world, Anderson says, because the markets are no longer just defined by stocks and bonds. Greater dents have also been made into the wall separating commercial banking - giving loans and receiving deposits - from securities underwriting, which is investment banking and brokerage. ``The account has forced brokers to look at banks and compete with them in a way they hadn't,'' she adds. ``The account also has made us aware of customer needs.''

Service has made the difference in CMA, says Patrick Walsh, vice-president of the Merrill Lynch Asset Accumulation Group. ``We were close to our clients and provided service,'' Mr. Walsh says, ``and our financial consultants saw the value-added benefits of the products themselves.''

It did not hurt that the account gave brokers a combined picture of their clients' resources.

``The CMA brokers knew where the money was and could offer other investment ideas, whereas other brokers had to scratch to find out where the client's money was to begin with,'' points out William Donoghue, publisher of Donoghue's Moneyletter, in Holliston, Mass. This knowledge effectively locked the client into a brokerage, he said.

If any drawback exists for the these accounts, it may be long-term growth. Long of Lipper Analytical says that CMA's growth was tremendous in the first five years, ``but Merrill hasn't seen that much growth since.''

``You've seen all the growth you will. Maybe there will be some growth for the corporate CMAs.''

Walsh says Merrill is trying to attract more assets into its accounts. Besides offering five types of CMA, Merrill is launching five new features, including a Premier Visa, which provides month-end debiting instead of the immediate debiting of its regular Visa card, and variable life insurance.

``Loyalty is a two-edged sword,'' Walsh says. ``We want to satisfy our clients so that loyalty is a foregone conclusion.''