Huge Growth in Fee-Based Brokerage

Huge Growth in Fee-Based Brokerage

Fee-based brokerage showed faster growth than any other segment of managed accounts over the last four years, according to a new report from Cerulli Associates.

Assets in the accounts have risen roughly 19 percent since 1999, according to the Boston-based firm’s report on the managed account market.

Total assets in fee-based brokerage accounts reached $201.5 billion through the end of third-quarter 2003—a growth rate of 34.7 percent for the year, compared with a rate of 26 percent for all managed accounts.

Cerulli says a combination of factors is fueling the growth. First, most firms have pushed advisors to adopt fee-based plans, with many offering training as well as compensation incentives for converts and newbies. These efforts are attracting younger advisors into fee-based brokerage, as well as other managed account programs, says the report.

Then there is the efficiency managed accounts bring to an advisors business. By allowing him to consolidate multiple types of investments into a single location, the fee-based accounts make planning and ongoing investment management much easier.

Lastly, although separate account and mutual fund advisory programs fall under the Investment Advisers Act of 1940, regulators have determined that the advice provided in fee-based brokerage is “incidental to the delivery of securities transactions,” and thus isn’t limited by the cost and compliance risks normally associated with the position of fiduciary.

Clients who benefit most from managed accounts are those who tend towards heavy trading activity. Though the accounts can also be a good fit for more sedentary customers, the NASD recently alerted members that there is a danger of abuse with such customers in that they’d essentially be paying fees for no services.

As for which firms are reaping the biggest gains from the segment, the report shows Merrill Lynch as the king of the fee-based mountain—a spot it has held firmly since the industry’s peak in 1999. Merrill has $73.8 billion in fee-based brokerage assets, but the industry’s expansion has taken a toll on the firm’s dominance, says the report. Its 12-month growth rate was only 16 percent, and assets have fallen nearly $20 billion since 2000.

Morgan Stanley has a 12-month growth rate of 40 percent and holds $27.8 billion in total assets. UBS ($23 billion), Smith Barney ($18.1 billion) and Charles Schwab ($11.6 billion) filled out the top. Further down the list, but by far the biggest mover in the top 20, was Bank of America Securities, with 606 percent growth in its Portfolio Edge program since offering it nationally in 2002.

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