20000316

'Fee brokerage accounts win over investors'

NEW YORK: Forget brokerage commissions, just pay me an annual fee and I'll take care of your investment portfolio.

That was the pitch an E. F. Hutton broker, Frank Campanale, made to a pension fund in the 1970s. Some 25 years later, the the market for fee-based and managed investment accounts has grown to more than $500 billion under management, and could top $1 trillion four years from now, according to consulting firm Cerulli Associates.

"I've been saying for years that the managed account is thebest-kept secret in the industry," said Campanale, who pioneered the concept and now oversees the managed accounts division at E.F. Hutton's successor firm, Citigroup Inc's Salomon Smith Barney. "The consultant and investor sit at the same side of the table."

Brokers who receive a certain percentage of their clients' assets are less likely to make unnecessary stock trades than brokers who are paid on commissions, Wall Street executives say. The arrangement also guarantees a steady stream of revenues at a time brokerage commission rates are falling.

Fee-based investment accounts, which typically start at $100,000, come in many forms.

The most common are managed accounts, or consultant wraps, whereby investors pay an annual fee - usually 2 percent of the assets - to have their money run by professional managers. These assets totalled $241.4 billion at year-end, making up almost half of the market, according to Cerulli.

But the market's fastest growing segment are fee-based brokerage accounts, where investors pay an annual fee for investment advice, free online trading and research. Wall Street firms have offered such programmes since last summer, in response to the success the No. 1 US discount and Web brokerage, Charles Schwab Corp., has had in attracting investor money.

"The amount of money flowing into these accounts has been astonishing," said Ryan Tagal, a Cerulli senior analyst.

Assets in fee-based brokerage accounts totalled $104.5 billion at year end, from practically zero a year ago, according to Cerulli. Merrill Lynch and Co. Inc., the No. 1 US brokerage, reported $63 billion in assets in its new brokerage fee-based account, Unlimited Advantage, which it launched last summer.

"That has proved to be probably the most successful product introduction we've ever had," said Merrill's chief executive, David Komansky, in a recent interview.

One reason brokerages are emphasising these type of accounts is the steady fall in commission rates, which used to be their bread-and-butter business. Some no-frills Internet brokerages charge as little as $5 a trade. Financial services powerhouse American Express Co. even offers free stock trades for clients with more than $100,000 in their accounts.

As a result, full-service brokerages are looking for other income besides processing, or executing, stock orders.

"Straight execution is basically valueless today," Komansky said. "The value-added element would be advising the client what to invest in and using your own capital to get the trade done at a certain price."

Annual charges for consultant wrap programmes have held steady for recent years, averaging about 2 percent of a client's money. Fees for fee-based brokerage accounts can total less than 1 percent, depending on the amount of money under management.

When Campanale made his pitch 25 years ago, he had not thought about what to charge.

"We pulled it out of our ear and said: 'Three percent,'" Campanale said. "By the way, our firm didn't like that."-Reuters