In a widely watched move, Prudential Securities has unveiled a new split-pricing plan that charges clients an annual fee for advice, and $24.95 for each transaction.
The Prudential Advisor program, rolled out in mid-May, is the first program at a major firm to separate the cost of advice from execution. Other fee accounts wrap execution costs into the advisory fee.
Clients with the new account will be able to trade online. The transaction cost is fixed, regardless of size and frequency.
The new program could help Prudential reps compete with--or even ally with--an online discounter.
One Prudential rep in California says he just took a million-dollar account away from E*Trade using Prudential Advisor. "They wanted to trade their own account but wanted someone to bounce ideas off," he says. The client liked the low transaction cost without restrictions. "They can call me anytime they want, and I charge them 90 basis points [on assets] per year."
Meanwhile, at an April managers' meeting, Prudential Securities CEO Hardwick Simmons indicated that the firm would consider some type of marketing alliance with an online discounter (see June 1999 RR, Page 24).
Clients enrolled in Prudential's new plan must have $100,000 and are charged an annual fee ranging from 1.5% down to 12.5 basis points depending on the amount and type of assets in their portfolio (see "Prudential Advisor Pricing," right). The annual fee is lower than the cost of Prudential's other fee-based accounts in which clients essentially prepay for a set number of trades a year, and are charged commissions for transactions beyond the maximum. The Advisor account is not available for IRA accounts.
PaineWebber officials, too, are planning a fee-plus pricing scenario to be rolled out in the third quarter, according to a firm spokesperson. Similar to Prudential's plan, PaineWebber would charge clients an annual advisory fee ranging from .5% to 2.5% of assets, and allow them to execute their own trades either online or through an adviser at a per transaction rate of between $5 to $25. The firm expects to offer the as-yet-unnamed program to clients with a $50,000 account minimum.
"We're recognizing there are clients who want to have the ability to execute the trades themselves," a PaineWebber spokesperson says. "A trade is just a clerical function to us. This is developing a pricing structure that pays our advisers for what they really do, which is give advice."
Officials at the firm have suggested that for a minimum fee of $1,200 a year, the firm would offer customers two yearly consultations with a broker.
In June, Merrill Lynch announced a new fee-based pricing program slated to debut this month that offers unlimited trading, either through a rep or online, priced at 1% for equity and fund assets, and 30 basis points on bonds and cash (with a minimum asset-based fee of $1,500 a year). The pricing option is part of a package of new services, including self-directed Internet trading (see "Merrill's Discounting Causes Shock Wave," Page 24).
Established programs like Merrill's Asset Power account limit the number of trades. One Merrill rep in California says he likes the idea of giving clients unlimited trading. "I'm always butting up against the 40 trade [limit] with Asset Power."
Salomon Smith Barney officials say while they plan to add online trading to their Asset One fee-based account before the end of the year, they likely will not follow in the footsteps of their Wall Street brethren by offering a fee-plus commission alternative. SSB says its affluent clients want the simplicity of a single fee, and don't want to be "nickeled-and-dimed" with per transaction charges.
"In our minds, [the Prudential plan] is just marketing spin, with no substance," says a SSB official who spoke on condition of anonymity. "We're honestly perplexed. It's just a slight tweak on their Valued Investor [fee-based] Program. It's pretty much the same fee, and the fee is still the preponderance of what you're paying. ... If a typical client with a $500,000 account pays 1.25% or $6,000 a year in Prudential's program, and does 15 to 20 trades and is charged several hundred dollars more for the trades, it's almost an insult."
Of greater concern for some brokers, however, is how purely transaction-based reps will be able to earn a living if clients start latching on to the notion of $24.95 trades at full-service firms. PaineWebber President Joe Grano reportedly told reps at a PaceSetters meeting in May that within the next five years there would be no more commissions on transactions. Though PaineWebber and Prudential both maintain that the traditional commission account is not going away, reps sense otherwise. "It's finally sinking in," says one PaineWebber rep in Florida. Purely commission-based reps "are in beginning panic stage."