June 7, 2007
By Evelyn Juan
DOW JONES NEWS SERVICE
NEW YORK (Dow Jones)– Morgan Stanley (MS) has given its brokers a go-signal to open new fee-based brokerage accounts despite a court ruling that raised questions about whether they are permitted.
“After evaluating the situation, management made the decision to continue allowing account openings as an accommodation to client demand,” said Jim Wiggins, a Morgan Stanley spokesman. He noted, though, that brokers should advise new clients that the regulatory status of the company’s so-called Choice accounts is uncertain and subject to change.
The Securities and Exchange Commission said May 14 that it wouldn’t appeal a federal court decision that in essence banned fee-based brokerage accounts, but asked that the court ruling be stayed for four months to give investors and brokers time to react.
At issue was a federal appeals court ruling in March that threw out an SEC rule allowing brokers to provide investment advice through fee-based accounts without being treated as investment advisors, who are held to a higher standard of client protection.
Brokerages have been shifting aggressively to fee-based models, which they see as providing more stable revenue streams. According to research firm Cerulli Associates, about one million fee-based brokerage accounts held about $277.4 billion in assets at the end of last year.
Brokerage firms now, in essence, must choose whether to switch customers to traditional brokerage accounts that charge commissions or to advisory accounts, which typically charge fees but hold advisors to a fiduciary standard.
Morgan Stanley initially told its 8,000-odd brokers that it would likely stop opening fee-based brokerage accounts as early as May 22, given the SEC’s move. The firm also urged brokers to consider alternatives for clients, given the uncertainty regarding the Choice accounts.
But shortly after the initial notice, Morgan Stanley decided to allow brokers to open new Choice accounts, enabling its brokers to gather more assets that can later be shifted to a new nondiscretionary fee-based advisory program that the company plans to roll out in the next few months.
The upcoming advisory account could be the most popular alternative to the fee-based brokerage platform, which is also nondiscretionary in nature – meaning financial advisors need to seek clients’ approval prior to executing trades.
“The whole nature of the business is to gather assets, so brokers are going to gather assets for this lucrative product,” said Lawrence L. Klayman, a securities lawyer dealing with clients who have sued Wall Street firms over fee-based brokerage accounts. “Brokers like this account, because it gave them freedom to give recommendations without adhering to strict standards.”
Some firms such as Wachovia Corp. (WB) and Citigroup Inc. (C) have discouraged brokers from opening new fee-based brokerage accounts until the SEC releases its guidance on the issue.
“We think it may be disruptive to the client to open such accounts right now,” said Alex Samuelson, a Citigroup spokesman.
Merrill Lynch & Co. (MER), which holds a third of the estimated $300 billion fee-based brokerage accounts industrywide, has remained defiant and said it will work with regulators to preserve their use.
UBS AG ( UBS) told brokers at its U.S. wealth-management unit that it is “business as usual” until further guidance from the SEC.
“The court didn’t say that firms have to get rid of fee-based accounts; they just need to have a fiduciary duty on them,” said Stuart Meissner, a securities lawyer in New York. “It’s up to the firms whether to take the potential liability.”