“Computers are plastic and metal and sand. People are brilliance and discernment and vision.” Merrill Lynch used that advertising slogan this spring to emphasize its commitment to personal service. But the words also underscore a deep divide within Merrill that has left the company confused about how to approach on-line trading and that threatens Merrill’s very future.

On one side stand the brokers, many of whom are as involved in their clients’ lives as any priest, rabbi, or therapist. The brokers, who can earn more than $1 million a year, are unwilling to give up their country-club existence, where they court customers on the golf course or over leisurely lunches of steak and lobster.

Across the divide stand the techies, who have religion about the prospects of on-line trading in ways that only young propellerheads seem to be able to muster. The techies chafed for years as Charles Schwab and some start-ups developed huge on-line businesses but were unable to get Merrill to even start to respond until recently.

Merrill has a long history of succoring both brokers and techies, and the groups have coexisted nicely—the leading-edge technology developed at Merrill was always in the service of the brokers. But this time, the two sides have butted heads because on-line trading has little place for brokers. As on-line pioneer E*Trade says in an ad that twits full-service brokers such as Merrill: “If your broker is so smart, why is he still working?”

The result of the culture clash is a situation that will satisfy no one. Brokers are furious because of the Merrill announcement in June that it will offer discount trading on-line. The techies are disappointed because they don’t feel the moves go far enough, fast enough—the techies’ biggest supporter, Merrill President Herb Allison, resigned this summer in frustration, by all accounts, at what he saw as the slow pace of change. Merrill, meanwhile, will spend heavily over the next two years to pay brokers for income they lose because of on-line trading. Yet Merrill doesn’t seem to have positioned itself well in on-line trading, a business that analysts say now accounts for one out of three stock trades and that is growing at a phenomenal pace.

Certainly, Merrill stirred up plenty of hoopla with its June announcement that it intended to challenge the on-line brokers. “Merrill Lynch sets new industry standard,” crowed a press release outlining the new service. To its credit, the company managed to beat to the on-line punch traditional rivals such as Salomon Smith Barney and PaineWebber. But there’s also a sense that the move on-line is a defensive action, and one that’s far too little, far too late. It’s worth noting that Merrill’s top brass declined to comment for this article.

Merrill watchers see a very different picture than the company does. Clay Christensen, a professor at Harvard Business School and the author of The Innovator’s Dilemma, says Merrill is a classic example of a company that has been so successful it can’t adapt to new conditions. “Merrill is just trying to milk the last couple of billion dollars of profit out of a dying business,” he says.

Merrill has always viewed personal contact as the key to its business. Back in 1946, when other brokerage firms unleashed armies of pushy, harried, ill-informed salespeople onto the postwar populace, Merrill established a training school for the brokers, whom it called “account executives.”

The well-trained brokers cosseted clients, who were greeted in wood-paneled offices and plush, private conference rooms. The account executives were part financial adviser, part friend, part therapist. “I know what sports my clients’ kids are playing; I know about illnesses in the family. It’s a relationship,” says one broker, who, like the others interviewed for this article, asked not to be identified because the situation at Merrill is so touchy.

In turn, the brokers were cosseted by the company that they affectionately refer to as “Mother Merrill.” Account executives are well-paid—earning an average of $200,000 to $300,000 a year. They receive ample training and generous perks, such as annual all-expenses-paid trips for top performers to destinations such as Miami, Palm Springs, and Bermuda. Ostensibly, these are business trips. But spouses go along and there tends to be more sun-tanning than seminar-attending.

The brokers have served Merrill well. They’ve been a mainstay of a business that has grown to more than $30 billion in annual revenue even as competitors such as E.F. Hutton, Kidder Peabody, and Shearson have stumbled. The key to this success: that personal touch. Following the October 1987 crash, for example, many brokers stayed in their offices all night so they could hold the hands of panicked clients.

But, when it came to on-line stock trades, the brokers fought as hard as they could against the prospect of such a thing happening at Merrill. People who worked there at the time say the idea of on-line trading first surfaced at Merrill in 1995, about the time the Charles Schwab brokerage house began hatching its own plans. But Merrill never went very far with the idea, largely because the brokers had such power and fought a series of rear-guard battles internally.

Early on, it wasn’t that hard to dismiss the idea. After all, why would Merrill want to handle stock trades for $30 each, as Schwab did, when Merrill had plenty of customers who were willing to pay its traditional fees of perhaps $300 on a $10,000 trade? And, in the early days of on-line trading, there simply weren’t a lot of investors who did business that way.

Christensen says Merrill’s reaction is very common. He says successful companies often ignore threatening newcomers until too late, because the upstarts take away only a little business, and that business is usually marginally profitable, at best, for established companies. On-line auctioneer eBay, for one, says auction house Sotheby’s Inc. used to send business to eBay, saying disdainfully that anyone wanting to sell things such as collections of baseball cards should take their business to the on-line version of a flea market. Now, eBay has expanded its franchise to include even some of the high-end goods that Sotheby’s is known for—and has a stock-market value more than six times that of its venerable competitor.

Even once on-line trading demonstrated its potential, the brokers’ champion, Vice Chairman John “Launny” Steffens, was famously quoted as saying in June 1998 that, “The do-it-yourself model of investing, centered on Internet trading, should be regarded as a serious threat to Americans’ financial lives. This approach to financial decision-making doesn’t serve clients well, and it’s a business model that won’t deliver lasting value.”

That Merrill has an on-line strategy at all is testament to its rich tradition of investing in technology. Merrill has bought so much computing power over the years that a former chief information officer says he had what he called a million-dollar coffee mug. When an IBM salesman came calling, the CIO would put a coffee mug from a competitor on his desk. The salesman would immediately cut $1 million off the price of each mainframe, for fear of having Merrill take its huge business elsewhere.

In 1993, Merrill management decided it was high time the brokers got a tech upgrade, so they could find research on-line, develop graphics on stock performance, and get stock quotes and updates on clients’ portfolios. Mother Merrill spared no expense: $825 million was earmarked for the development of the brokerage system, called Trusted Global Adviser.

Eventually, the effort turned into a sort of Trojan horse that introduced on-line trading to Merrill. The reason is Tony Pizi, a Merrill veteran who was charged with leading the upgrade. Pizi had earned his position by creating a global network linking 1,500 investment bankers at a time when not many folks were linked together at all. By the time he was chosen for the TGA project, he was highly respected both inside and outside Merrill. Pizi’s office boasts pictures of himself with such luminaries as Steve Jobs and Bill Gates. He also has an arsenal of 12 Nerf guns, which he uses for the occasional battle to provide his team with stress relief.

Pizi ruthlessly focused on using technologies that he believed would be industry standards for years. When it came time to select an operating system, for example, Pizi chose Microsoft’s Windows even though Merrill had a long relationship with IBM. He also chose Cisco’s networking equipment, which, as it turns out, is the backbone of the Internet. In sum, Pizi’s choices gave Merrill a system that used all the same basic technology as the Internet, making a move to on-line trading relatively simple. (For good measure, the system was rolled out on time and was only 3% over budget—a remarkable performance in the world of information systems development. Gates devotes 10 pages to Merrill’s TGA in his latest book, Business @ the Speed of Thought.)

In September 1996, Merrill expanded TGA from a brokers-only system to a tool for its clients, as well. Visitors to Merrill’s Web site could find the nearest Merrill branch office, get a stock quote, or check their portfolio balance. During the summer of 1998, Merrill launched a service that allowed customers to transfer balances while visiting the on-line site. In November, Merrill started a pilot program offering its vaunted research free on-line. In mid-May of this year, Merrill announced the formation of a new business group that would focus on providing services to institutions over the Internet.

But Merrill kept assuring brokers that it would never give up the human touch that made the firm famous. So the policy remained unchanged: No on-line trading.

Vice Chairman Steffens, head of Merrill’s brokerage operations, is, perhaps, the only person at Merrill with the credibility to make on-line trading take hold at Merrill. At 58, Steffens is a feisty pit bull of a man with a stellar track record. Back in 1975, he played a key role in a landmark decision that brokers hated: getting Merrill into the cash management accounts business. This allowed the company to better compete with banks by combining brokerage, money-market, and checking-account functions. It turned out to be a great move, even for the brokers. Steffens also championed a move toward financial-planning services during the 1980s. Again, the brokers balked. Again, it proved a smart move. Thus did Steffens build a reputation as a protector of the brokers, exercising tough love when necessary to push them into vital new areas.

Steffens, having attacked on-line trading as practically un-American in June 1998, has been quoted as saying he subsequently had an epiphany. He realized that all the Federal Express packages arriving at his home were items purchased by his children on-line. One of his children has also mounted a personal campaign to bring his father into the Internet Age.

With Steffens shifting his position, Merrill made an announcement on June 1 of this year that may cause the biggest earthquake in the firm’s 85-year history. Merrill said that, starting July 12, it would offer unlimited trades to clients paying Merrill a minimum fee of $1,500 a year. The trades could be placed via the Internet or by any other means. By December, Merrill will offer trading for $29.95 a pop to anyone placing an order on-line.

But Steffens doesn’t seem completely sold on on-line trading.

One day after the resignation of Allison, Merrill’s frustrated president, Steffens was quoted as saying he expected brokers to use the $29.95 trades “for defensive purposes.” In other words, the brokers can be expected to use it simply to prevent clients from running off to Ameritrade but will still try to cling to the old ways of developing relationships with clients.

The brokers are counting on clients to need that patented personalized touch in the form of estate planning or a portfolio overhaul, even if they’ve been drawn to Merrill by discount on-line trades. There’s also a sense that the bull market has made investors overly self-reliant. At the first sign of a down market, brokers assume that prodigal clients will come rushing back to Mother Merrill for advice and hand-holding.

With Allison gone, analysts and insiders expect Steffens to downplay Merrill’s on-line brokerage offering. He now apparently holds even more power than he used to have.

In the meantime, nobody at Merrill can be very happy with the state of affairs.

The brokers have been the most vocal about their unhappiness with the on-line initiative, code-named “Rubicon” in honor of a river Julius Caesar fatefully crossed, forcing him to engage in the battle that resulted in his being named the Roman emperor. Even though Merrill crossed its Rubicon a full three years after Datek and E*Trade began offering on-line trading, Merrill’s broker force has expressed surprise and anger.

Oddly enough, they are registering much of that shock in chats on the Internet, in particular at VaultReports’ “Electronic Watercooler.” “I think management should have gotten more input from brokers,” reads a message from a broker who used the pseudonym, Worried. Another message, under the heading, “Stop the BS,” reads: “Merrill was outright stupid to do this.”

Since the June 1 announcement, Merrill has held about a half-dozen meetings to try to calm its restive brokers. These conferences were open to the entire force, 16,000 strong, and available in streaming video over the TGA system. Brokers were encouraged to submit questions to management—in another irony—via e-mail.

But the brokers interviewed for this article were still concerned. “This is like when doctors moved to HMOs,” one says, referring to the fact that doctors’ fees dropped considerably. Another says, “Merrill taught me how to make a living this way. They had better be careful not to shoot themselves in the foot.”

To keep brokers from revolting, Merrill is going to have to pay heavily to supplement the lost income of its entire broker force for the next two years. In year one, brokers will receive a dollar-for-dollar subsidy for whatever business they lose to on-line trading. In year two, the supplement will be in Merrill stock. Ex-President Allison has said that he expects broker compensation to drop 18% on average under the new plan in the near term.

Largely because of the shift to on-line trading, Merrill’s total profit will decline 10% a year for the next two years, predicts Joan Solotar, a securities analyst with Donaldson, Lufkin & Jenrette.

And yet, Merrill is still way behind in on-line trading, where Schwab has accumulated customer assets of $251 billion. On-line trading is going to soon become far more important, too, if Gomez Advisors, an Internet consulting group, is anywhere close to right. Gomez says the number of on-line trades will double this year and again next year.

And guess what? On-line stock trading is just the first of the challenges that the Internet will present Merrill.

A host of start-ups are taking aim at the investment-banking business where Merrill, and many others, have long generated impressive profit margins. Companies such as W.R. Hambrecht, started by the co-founder of investment bank Hambrecht & Quist, argue that they can sell stock to the vast audience of Internet users, providing a new source of funds for companies. Traditionally, funds have come mainly from investment banks’ large institutional clients, such as pension funds.

The newcomers also argue that they can increase the price at which companies sell stock. At the moment, investment banks underprice stock offerings. They then distribute the underpriced shares to favored clients, expecting to get business in return. But every dollar that winds up in the pocket of a client is a dollar that didn’t go to the company issuing the shares. So companies such as Hambrecht use auctions to find the true market value of a stock.

While the start-ups haven’t yet had much effect on investment banking, it’s hard to imagine that they won’t. They will appeal to a new, large group of buyers of stock issues. They can also benefit sellers. And they are willing to operate at far narrower profit margins. It may take a year or two for the start-ups to reach critical mass, but the result will be pressure on everybody in the business.

At Merrill, investment banking generates more than half the profit, so problems there would be an even bigger blow than the threat that on-line trading is creating for its brokerage side. In fact, any trouble with investment banking would extend into the brokerage side of the business. Many big clients have been willing to pay high brokerage fees precisely because they get cheap stock in initial public offerings. Without that stock, that business goes away.

“The Internet shakes up a lot of traditional models and creates disparities,” says Karen Hoffman, an analyst with Gartner Group. For high-touch companies like Merrill, that means at least a few rough years, and maybe worse.

Justin Martin is a free-lance writer based in New York City. He can be reached at justinmartin@earthlink.net.