The vice chairman of the world's largest full-service brokerage firm fired a shot into the ranks of on-line discount brokerages, calling do-it- yourself Internet trading a threat to consumers.

In addition, said John L. Steffens, vice chairman of the board at Merrill Lynch & Co. in a speech last week, "As a business model, it is not likely to create long-lasting value."

He cited a study that uncovered danger in trading without professional advice. The study found that the 20% of households that trade the most realized a 10% annual return, while the rest of the market earned a 17.1% return.

The author of the study, Brad M. Barber, associate professor of finance at the Graduate School of Management at the University of California, analyzed the investment performance of more than 60,000 household customers of a large discount brokerage firm, from February 1991 through December 1996.

"We argue that the well-documented tendency for human beings to be overconfident can best explain the high trading levels and the resulting poor performance of individual investors," said Prof. Barber's study. "Our central message is that trading is hazardous to your wealth."

Mr. Steffens concluded that investors perform best with advice: "It takes the competency of humans to help people invest in the future. I think new technologies will accelerate, but these realities will remain timeless."

Merrill Lynch intends to dominate the advice segment of the marketplace, Mr. Steffens said.

With 14,000 trained financial consultants, "our strategy is to create value for our clients. Companies that simply provide information won't create much value," he added.

Advice is a component of Merrill Lynch On-line, which has 304,000 clients and $193 billion of assets. The average on-line investor has $700,000 of assets.

In the fourth quarter, the service will be able to execute trades. Pricing will include an initial fee, and trades will be free.

Mr. Steffens stressed that client information systems are an important area of investment by Merrill Lynch.

"As individuals grow in net worth, the ability to get more sophisticated information can be created in software capabilities," he said.

He warned against the proliferation of plain-vanilla, low-cost transaction services.

"The ability to conduct straightforward transactions is racing down the price curve to commodity status," he said.

He contended that on-line trading, although it is grabbing more of the market, represents "only 10% of total profitability."

Bill Burnham, equity research analyst at Deutsche Bank Securities, said there will always be a role for the full-service brokerage but that the industry will continue to move toward self-directed investment.

"The retail brokerage monopoly on market information has eroded over the last 20 years," he said. "The Internet has turbo-charged that trend, and now it's a case of personal preference."

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