SEC slows brokers in race to offer online bill payment

Handling the monthly bills for clients is shaping up to be the next big thing for financial advisers.

But the nation’s pioneering discount brokerage company and its competitors are being hampered by federal regulations.

While banks are rushing to add the service to their websites, Charles Schwab & Co. and other companies regulated by the Securities and Exchange Commission are limited in what they can offer to advisers.

The hiccup for advisers is that they are prohibited from having custody of clients’ assets.

So while they can help clients manage their finances, and advisory firms can offer online bill payment, SEC asset custody rules prevent advisers from managing the entire payment process.

Schwab, TD Waterhouse, Fidelity Investments and any other financial services firm under SEC control can only assist their clients with the process. Customers must still take action to pay their monthly bills.

While registered investment advisers remain at a disadvantage, banks and certified public accountants face no such hurdle.

Companies such as New York-based Bessemer Trust have been paying bills for their wealthy clients for years, as have other old-line trust companies.

Nicolette Angelos, head of Schwab Institutional’s marketing, has challenged Schwab’s team of corporate lawyers to find a way for Schwab advisers to manage clients’ bills without overstepping SEC rules.

“Bill payment is the next frontier,” says Jim Marks, an analyst with Credit Suisse First Boston in Philadelphia.

Indeed, managing a client’s monthly bills – including mortgage payments, utilities and credit cards – is proving to be an attractive way for financial services firms to lure new clients and keep the ones they have.

And the market is set to explode.

While only 0.5% of bills in the United States are now paid online, that number is expected to leap to 14% by 2005, according to research firm IDC of Framingham, Mass.

By 2010, some 29% of bills will be paid online, says TowerGroup, a research group in Needham, Mass.

Most banks and brokerage firms now offer some form of online bill-paying service, and there’s little wonder why.

San Francisco’s Wells Fargo & Co., which pays bills on behalf of its clients, reports that its client retention rate is 54% better than with those who do not use the service.

Mr. Marks says bill paying works because it creates a regular monthly relationship.

And while the process might add administrative headaches, managing clients’ financial affairs provides a valuable window into their cash flow.

Holy grail

Taking over clients’ hassles in managing their bills is the Holy Grail for service.

“There’s definitely a different bill-paying experience” that comes from having the adviser take responsibility, Ms. Angelos says.

She says bridging the gap caused by federal regulations will take financial and legal expertise. At this stage, Schwab has no proposal to lodge with the SEC.

“What we need to do is incorporate the SEC custody issue into a financial product,” she says. “I think it is possible.”

The problem, however, is that any changes giving investment advisers custody of assets would red-flag them for the SEC to have them audited.

Neither TD Waterhouse nor Fidelity has taken steps to empower their advisers to make transactions for their clients, although a Fidelity spokesperson confirmed that the firm is looking into it.

Jon Holtaway, a banking analyst with Danielson Associates Inc. in Rockville, Md., adds that Schwab and other firms have a hard time getting a leg up with bill paying because there are few barriers for competitors to offer the service. He says that one bank in Virginia paid an outside firm only $25,000 to set up the service.

“It’s a natural extension to online brokerage,” says Greg Smith, an online brokerage analyst with Chase H&Q in San Francisco. “But I think there’s a ways to go before the process is seamless.”

some downsides

While consumers want to avoid the monthly crush of ripping envelopes, writing checks, licking stamps and finding a mailbox, there are still some downsides.

Analysts say clients still consider paying by check more convenient and a more secure way to pay.

Another hindrance is that state regulators still require some firms to send paper bills, regardless of the payment method.

At the other end of the bill-payment process, corporations waiting for their monthly checks are happy to participate.

The process cuts their billing costs by up to 90%, according to Danielson Associates.