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( DJ ) 08/30 12:37PM =DJ BROKER'S WORLD: Merrill, Morgan Mull New Brokerage Account
By Evelyn Juan
A Dow Jones Newswires Column
The so-called "Merrill Lynch rule" may be dying soon, but for Merrill Lynch
& Co. (MER) and Morgan Stanley (MS) its spirit lives on.
As the Oct. 1 deadline near to the ending of fee-based brokerage accounts,
both firms are mulling a new platform that would enable clients to maintain
paying a fixed fee based on their level of trading activity.
The new account, according to people familiar with the plan, will be
brokerage in nature but clients would pay a fixed commission based on trading
frequency rather than a fee based on their assets.
A spokesman at Merrill said it is premature to discuss the issue. A
spokesman at Morgan Stanley declined to give details on the so-called "World
Wise" project the firm is actively developing.
Both firms' move is seen as a clever attempt to skirt a March ruling by the
U.S. Court of Appeals for the D.C. Circuit against fee-based brokerage
programs under the Securities and Exchange Commission's rule 202.
The so-called Merrill rule allowed brokers to charge fees based on client
assets and offer investment advice on brokerage accounts without being subject
to the Investment Advisers Act that holds advisors to a higher standard of
client protection than that required of brokers.
With the court ruling forcing the closing of those accounts, Merrill's and
Morgan Stanley's upcoming brokerage platforms could allow them to have similar
pricing structures to the fee-based brokerage model that the court declared
The new platform could also preserve access to investment products that will
be restricted from clients if they are simply switching accounts into an
advisory platform, which is the current popular option for Merrill's and
Morgan Stanley's rival firms.
Preserving the key attributes of the fee-based brokerage platform is
important for keeping the hundreds of billions of dollars in client assets
that are tied to these accounts, which will soon be shuttered.
These accounts, which allowed clients to pay an annual fixed rate, have been
popular as part of brokerage firms' transition into generating a steadier
source of revenue based on annual fees rather than commissions.
Merrill, one of the most vocal opponents of abolishing these accounts, holds
one-third of the $300 billion in clients assets tied to fee-based brokerage,
while Morgan Stanley oversees around $30 billion.
"The fee-based (brokerage) business is too large to walk away from," said
James Eccleston, a securities lawyer dealing with Wall Street firms. If
Merrill's and Morgan Stanley's alternative brokerage platform work, Eccleston
expects other firms to "hop on the bandwagon."
As Merrill Lynch and Morgan Stanley develop their alternatives, Citigroup
Inc. (C) unit Smith Barney has SB Advisor while UBS Wealth Management US of
UBS AG (UBS) has Strategic Advisor as alternative advisory programs.
Alex Samuelson, a Citigroup spokesman, said the firm isn't developing a
similar program to Morgan Stanley's or Merrill Lynch's. However, clients can
still access brokerage products that are restricted from Smith Barney's
advisory program by maintaining dual accounts in brokerage and advisory.
As of July, half of Smith Barney's more than 15,000 financial advisors
opened at least one SB Advisor account, representing over $20 billion in
client assets across 65,000 accounts. "We anticipated a possible problem with
fee brokerage and our regular interaction with FAs helped to develop this
solution," Samuelson said.
Legal experts warn of tricky challenges tied to Merrill's and Morgan
Stanley's upcoming programs, particularly on the issue of providing advice.
Both firms may argue that brokers are not compensated for giving advice in a
brokerage account, which excuses them from being subject to the Investment
Advisers Act of 1940.
However, clients should be able to expect fiduciary care no matter what type
of account they have, said Lawrence Klayman, a securities lawyer who
represented clients suing firms over fee-based brokerage accounts. After all,
clients typically go to a full-service brokerage firm to get advice they can't
get from discount brokerages, he said.
Advice in transactional accounts could be about whether to buy, hold, or to
sell a stock, bond or mutual fund.
Advice in advisory platforms could include estate planning, saving for
retirement and other comprehensive plans for the clients' long-term goals.
Brokers, once known only as stock jockeys, have been moving towards this type
of advisory relationship with clients as part of the industry's transformation
towards fee-based business over the past 15 years.
"If a firm holds itself out as giving advice, they are subject to
suitability no matter if it's per-transaction or comprehensive," Klayman
The Financial Planning Association, which sued the SEC over the fee-based
brokerage program, said Merrill and Morgan Stanley should ensure that either
is not bundling transactions for a certain fee while providing "free"
comprehensive advice under the new program.
If both firms start marketing free financial plans under the new program,
"then that flies in the face of the court's decision," said Duane Thompson,
managing director for FPA's Washington office.
Additionally, the fixed annual commission could encourage churning by
unscrupulous brokers who could use this practice to be paid more if their
clients fall under a higher level of trading activity.
Both Merrill and Morgan Stanley are still drafting details of the plan but
people familiar with them said the rates might be based on different tiers of
"The devil is in the details, and that's what we've yet to see," Eccleston
(Evelyn Juan writes about the transformation of the brokerage business from
a transaction-oriented model to fee-based financial advising.)
-By Evelyn Juan, Dow Jones Newswires; 201-938-2312; firstname.lastname@example.org
(END) Dow Jones Newswires
Copyright (c) 2007 Dow Jones & Company, Inc.
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