Firms brace for end of broker-dealer rule

With the deadline for ending fee-based brokerage accounts looming, big brokerage firms are scrambling to move their customers into advisory accounts.
New York’s Merrill Lynch & Co. Inc., the industry leader with $108 billion in fee-based brokerage assets, is in the “client communication stage” and still tinkering with Merrill Lynch Personal Advisor, the fee-based non-discretionary advisory platform that will house thousands of the firm’s fee-based brokerage accounts after the Oct. 1 deadline goes into effect, spokesman Erik Hendrickson wrote in an e-mail.
But one Merrill Lynch broker, who would not speak for attribution, said last week that he was still waiting for further instructions from the company.
“Merrill’s done some training, but really, they haven’t told us anything,” said the broker, who manages about $40 million of assets on Merrill’s fee-based brokerage platform.
“Our advisers have been fully briefed on our transition plans,” Mr. Hendrickson said in a follow-up e-mail.
The broker anticipates that his customers will end up paying higher fees to switch to the MLPA accounts.
Further, he expects to lose a few active traders who have been using the firm’s fee-based brokerage platform, Merrill Lynch Unlimited Advantage. “We have no platforms like that,” the broker added.
Mr. Hendrickson declined to address the broker’s comments regarding the fees his customers may end up paying.
The issue is unfolding quickly.
Last week, the Securities and Exchange Commission approved a temporary rule allowing firms that are dually registered as broker-dealers and investment advisers to sell clients in non-discretionary advisory accounts securities that are owned by their firms, as long as disclosure requirements are met.
A substantial part of the brokerage business comes from such “principal trades.”
The rule was approved to meet the Oct. 1 deadline set by the U.S. Court of Appeals for the District of Columbia Circuit for the transition of fee-based brokerage accounts.
The Denver-based Financial Planning Association had agreed to go along with the SEC’s temporary principal-trade rule, which is set to end Dec. 31, 2009 (InvestmentNews, Aug. 20).
But at last week’s SEC meeting, commission members Paul Atkins and Kathleen Casey raised questions about whether the rule’s end date should be extended or whether the rule should be made permanent.
“The two-year sunset on the rule will allow us time to adopt permanent principal-trading relief once we have the benefit of comments on this rule,” as well the results of a study by the RAND Corp. of Santa Monica, Calif., on broker-dealer and investment advisory regulation, which is due at the end of the year, Mr. Atkins said.
That issue could be the next hot-button item in the thorny relations between the investment advisory and brokerage businesses.
The two-year time frame for the principal-trading rule should give the SEC enough time to decide how it wants to move on regulating investment advisers and broker-dealers, said Michael Udoff, managing director and associate general counsel of the Securities Industry and Financial Markets Association of New York and Washington.
Consent needed
Last week, most brokerage firms were focusing on getting last-minute consent from clients to move fee-based brokerage accounts — there are 1 million, with about $300 billion in assets — into other types of accounts.
“It’s a very short amount of time for a positive consent transition like this,” in which clients must give written permission for their accounts to be switched to new accounts, said Ronald Fiske, managing director of Pershing LLC of Jersey City, N.J., which provides administrative support for 870 brokerage firms.
Pershing had about $22 billion in fee-based brokerage assets at the end of the second quarter, the fifth-largest amount in the industry, according to Cerulli Associates Inc., a Boston market research firm.
Most of the 160 broker-dealers that offer fee-based brokerage accounts through Pershing have indicated they want to switch to advisory accounts, Mr. Fiske said.
But without written authorization from clients, the accounts will become commission-based accounts Oct. 1. “A few firms have gotten their paperwork in, but they’ve been the exception rather than the rule,” Mr. Fiske said.
Most brokers are “still evaluating how they should divide their clients between [the] advisory business or [the] commission-based business,” said Jeff Strange, a senior analyst with Cerulli.
Non-discretionary advisory accounts are “where a lot of the fee-based brokerage programs are migrating to,” he said.
Assets in New York-based Citigroup Inc.’s non-discretionary advisory accounts mushroomed by 152% from July 1, 2006, through June 30, 2007, to $19.6 billion, according to Cerulli’s figures.
Citigroup showed the largest increase among brokerage firms in assets in such accounts. Citigroup’s fee-based brokerage assets declined 15% to $19 billion over the same period, according to Cerulli.
Today, fee-based brokerage assets are down to $16 billion, according to Alex Samuelson, spokesman for Smith Barney, the retail-brokerage unit of Citigroup.
When the appeals court overturned the SEC’s broker-dealer exemption rule, “we sort of anticipated [the] decision,” he said. “That coincided with a natural slowdown in AssetOne,” Smith Barney’s fee-based-brokerage-account program.
Smith Barney in August lowered the account minimum on its fee-based non-discretionary advisory platform, Smith Barney Advisor, to $25,000 per household, rather than $25,000 per person (see related story, Page 16).
UBS’ Wealth Management US unit in New York recently notified clients in the company’s InsightOne fee-based accounts — which hold some $30 billion — of their options to move their assets to non-discretionary advisory programs such as Strategic Advisor, UBS spokesman Kris Kagel said.
He declined to comment on how many customers have switched to other programs. The company has lowered its account minimum for Strategic Advisor to $50,000, from $100,000.
Morgan Stanley of New York, which has $30 billion in its Choice fee-based brokerage accounts, is “well along in the process of helping our clients find appropriate alternatives,” said spokeswoman Christy Pollak.
The company sent letters to clients in August. “We are offering a range of alternatives, both brokerage and advisory accounts, for them to consider in consultation with their financial adviser,” Ms. Pollak said.
Sara Hansard can be reached at [email protected].