Brokerages shuffle fee accounts

IRVINE, Calif. — Brokerage firms, preparing to transition existing customers into alternative fee programs, are putting the freeze on new fee-based brokerage accounts. The industry reaction comes in the wake of a March 30 ruling by the U.S. Court of Appeals for the District of Columbia Circuit overturning the Securities and Exchange Commission’s controversial broker-dealer rule. As a result of the court decision, assets in fee-based brokerage accounts must be moved to either an advisory account or a traditional commission account. About $300 billion resides in some 1 million fee-based brokerage accounts, according to industry reports. Morgan Stanley of New York, as of May 22, no longer will offer its fee-based brokerage program, the Choice account, to new clients, said company spokesman Jim Wiggins. The firm is the second-largest sponsor of fee-based accounts, with an estimated $33.5 billion in assets, according to Boston-based Cerulli Associates Inc. The firm has another $6 billion in the program from its high-net-worth unit. Merrill Lynch & Co. Inc. is the largest sponsor of fee-based brokerage accounts, with $102.8 billion in its program, as of March 31, according to Cerulli. Merrill’s Unlimited Advantage accounts still are available “but we’ve been getting the heads-up” that clients may have to switch, said a Merrill rep in California who asked not to be identified. Meanwhile, Wachovia Securities LLC of Richmond, Va., closed its Pilot Plus fee-based brokerage program last week, according to spokeswoman Teresa Dougherty. Other firms, including Citigroup Inc.’s Smith Barney brokerage unit and UBS Financial Services Inc., both in New York, have been discouraging reps from opening new accounts. UBS, with $30.2 billion in assets in its InsightOne account, ranks No. 3 in terms of fee-based brokerage sponsors. “The focus of our internal education has been on programs other than AssetOne,” the firm’s fee-based brokerage offering, Smith Barney spokesman Alex Samuelson said. AssetOne holds about $20 billion in assets, he said. Leonard Reinhart, president of Lockwood, a Malvern, Pa.-based affiliate of Pershing LLC in Jersey City, N.J., said that Pershing has not shut down the fee-based brokerage platform used by its broker-dealer clients. The program, internally known as Avail, has $29 billion in assets, he said. “I’ve been getting a lot of phone calls from Pershing clients” asking what to do about fee-based brokerage accounts, Mr. Reinhart said. He said that Lockwood would be communicating this week with its broker-dealer clients about the decisions they have to make. Firms that are not already registered as investment advisers have fewer options, Mr. Reinhart added.
Delay likely The SEC decided not to appeal the court decision, which was due to go into effect today. Instead, the SEC asked the appeals court to delay implementing the decision for another four months. Although the SEC will not comment, industry insiders believe the court will approve the request. At press time, no decision had been made by the court. The big firms with most of the affected assets — Merrill, Morgan, UBS, Smith Barney and Charles Schwab & Co. Inc. of San Francisco — already, or soon will, have advisory versions of their fee-based brokerage accounts. Together, these firms account for 75% of fee-based brokerage assets. Mr. Wiggins said that Morgan Stanley is “accelerating” its development of an advisory version of its Choice account and expects to have the offering available within four months. The tentative name of the program is Morgan Stanley Advisory. UBS offers an advisory alternative called Strategic Advisor. Charles Schwab will be converting its Private Client fee-based program into an advisory account “as quick as we can,” said spokeswoman Sarah Bulgatz. A separate version of the offering was closed to new investors within the last year, she said. Together, the programs serve 100,000 investors, Ms. Bulgatz said. She declined to specify assets. Cerulli estimates Schwab had about $29.5 billion in the accounts as of the first quarter. Merrill launched its advisory account, Personal Advisor, last fall, said Jeff Strange, senior analyst at Cerulli. The program has about $800 million in assets so far, he said. “It’s in its infancy,” said a Merrill rep based on the West Coast who asked not to be identified. Although this development potentially can cause some major disruptions, clients can, of course, transfer their accounts into any number of other wrap or commission accounts, industry observers say. Meanwhile, the Securities Industry and Financial Markets Association of New York and Washington claims that the four-month stay the SEC is seeking won’t be enough time for the industry to handle the account conversion. SIFMA also says that loss of the exemption will limit investor choice and raise costs. “Some firms might have [alternative accounts] in place, but steps are still going to be required” to transition customers, said SIFMA spokesman Travis Larson. Transitioning fee-based brokerage customers “will not be complete with the flip of a switch or the change of some software,” he said. Mr. Larson said that firms will have to decide what accounts to offer as alternatives, put systems in place to support the changes, inform consumers and give them time to decide. How quickly clients sign and return paperwork also is unpredictable, industry observers say. With a million accounts to move, “we think 120 days is insufficient,” Mr. Larson said. Jennifer Feugill, an analyst at Cerulli, said that the research firm did not have an estimate of what it might cost firms to make the transition. Mr. Strange said that the task will be difficult, but as an example, he noted that Raymond James Financial Services Inc. of St. Petersburg, Fla., in 2005 converted all of its fee-based brokerage clients into alternatives. About 80%of those clients chose the firm’s advisory accounts, said Raymond James spokeswoman Anthea Penrose. Industry observers say that the big firms already are well positioned to respond, since they’re all dually registered as brokers and advisers, and have a number of alternatives from which clients could choose. Washington bureau chief Sara Hansard contributed to this story.