According to a report from Celent Communications, the effects of prolonged market difficulties and last year’s Wall Street scandals are forcing a transformation of traditional retail brokerage firms.

The 40 page report, entitled Retail Brokerage Trends & Strategies: The Road to Redemption, examines the major factors affecting brokers and the brokerage industry, and ultimately predicts “the end of retail brokerage as we know it.”

Specifically the report chronicles the transition to fee-based services at brokerage houses.

Commission-based transactions continue to make up the lion’s share of revenue, but asset management fees have consistently risen over the past ten years, and now comprise almost 15 percent of revenues, according to the report.

Fee based products, such as the separately managed account, have experienced significant growth. Statistics from the Money Management Institute indicate that assets held in separately managed accounts reached $398.7 billion in 2002, compared to $161 billion in 1996.

Alenka Grealish, senior analyst with Celent and author of the report, says the move to fees is being accelerated by the way investors are reacting to the troubles in the markets (and in the brokerage industry). In particular, she noted that nearly $500 billion in investor money has fled equities—a “red flag indicating change is paramount.”

One of the ways wirehouses are reacting is to give investors places to shelter their money from the storms battering equities. For instance Merrill Lynch and Salomon Smith Barney have been able to stem asset losses by shifting customer funds into insured-deposit accounts at affiliate banks.

Stephen Winks, founder of the Society of Senior Consultants and publisher of Senior Consultant, says other firms might try variations on this strategy as a means for retaining their best customers. “Brokerage firms want to focus on that 10 percent of the population that has 90 percent of the wealth,” he says.

Winks and Grealish agree that the transition to a new brokerage model will be a gradual process, playing out over the next five or 10 years.

“It’s like moving a mountain,” says Grealish.

“We’re not close to the end,” adds Winks. “But it’s the beginning of the end.”