Sharp Words for the NASD By Raymond James’ Averitt

SALT LAKE CITY—Brokerage firm executives aren’t generally known for their glowing adoration for regulators and their proposals, but Dick Averitt of Raymond James Financial Services had some particularly harsh words for the NASD in a speech here Monday morning.

Speaking at RJFS’ semiannual financial conference, Averitt, RJFS’ CEO, directed sharp criticism towards NASD regulators currently investigating fee-based advisory practices. “Fee-based accounts are not necessarily entered into because they’re cheaper,” Averitt said. “It’s not a price issue, it’s a relationship issue. And at the moment, that’s not being given credence, and I don’t know whether that’s because they don’t understand them or it doesn’t serve their purpose to understand.”

In a notice released in November, the NASD announced it was investigating the appropriateness of fee-based accounts, but the investigation, so far, has largely concentrated on whether the accounts justify the fees when compared to what the charges would have been had the client chosen a transactional approach.

“They’re taking a strict interpretation, that if you paid more in a fee-based account, that a) you paid too much; b) you’ve been overcharged; and c) there’s a wrong that needs to be righted,” said Averitt. “If a doctor examines you and says there’s nothing wrong with your labs, do you get your money back?” (About 950 financial advisors are attending the three-day conference.)

Currently, about 20 percent to 25 percent of client accounts in the industry are fee-based, and that percentage has been growing. Some of the larger wirehouse firms—including Morgan Stanley, Merrill Lynch and UBS—offer higher payouts on fee-based assets than on transaction-based business. One Morgan Stanley advisor, who agrees that the NASD is overreaching in its probe, nevertheless believes that paying reps more on fee-based business is only “giving the NASD ammunition” to investigate these types of accounts. The NASD investigations into the appropriateness of fee-based accounts have included the NASD calling retail investors to ask about their fee-based arrangements with advisors.

“We’ve asked them, ‘What is it you’re seeing that we don’t see?’” said Averitt, who points out that Raymond James does not give a higher payout to advisors for fee-based business. “If there are grievous abuses, they’re so foreign to us.”

Advisors at the conference agreed, pointing out that the asset allocation and investing processes are being left out of the equation in the NASD investigation. “There are five steps there, including the performance monitoring and investment management,” said David Yvars, an advisor and portfolio manager in Valhalla, N.Y. “It only breaks down when the advisor is not being professional.”

A Successful 2004

Meanwhile, Averitt pointed out the firm brought in $611 million in revenue in its fiscal 2003, second-best only to 2000, the year the market peaked. However, for the 10-month period ended in July, it was at $653 million in gross revenue, putting RJFS on pace for $765 million for the entire year. Of that revenue, 41 percent is considered recurring revenue (either fee-based arrangements, wrap programs or sales of C shares). Average advisor production rose to $223,000, Averitt said. Overall, the number of advisors in RJFS has dropped to 3,657 from 3,751, but the CEO said that was largely because the firm started to enforce minimum production requirements in the middle of last year, forcing some producers to leave the firm.

Raymond James also recently introduced a new managed account program that puts it on a level footing with other firms that had been ahead of them, by adding recommended model portfolios rather than simply providing a list of managers for advisors to choose from. The new group of managers number about 70, according to Jeff Holland, vice president in consulting services. Eventually, Holland says, the firm wants to offer some type of unified managed account product that would encompass mutual funds, ETFs and individual money managers. He did say, however, that the firm was hoping to roll out some kind of ETF wrap program by the beginning of 2005. The firm currently has about $7.5 billion in assets in separately managed accounts.