July 22, 2008
By Evelyn Juan and Daisy Maxey
Dow Jones Newswires
Clients outside the U.S. are now feeling the pinch of Wall Street’s pursuit of the richest of the rich at the expense of those who are less wealthy.
After suddenly closing its Brazilian offices in Rio de Janiero and Sao Paolo, Wachovia Securities will terminate some accounts of Brazilian clients, giving them up to Aug. 15 to shut their accounts with the Wachovia Corp. (WB) unit. Wachovia didn’t explain why the firm is asking its customers to terminate their accounts or why it closed offices in Brazil.
But based on a client letter reviewed by Dow Jones, Wachovia is giving only three options to affected customers: They can transfer their accounts elsewhere; request for delivery of the securities to their address; or liquidate investments.
Wachovia declined to say what the thresholds are for terminating accounts. But a broker whose clients were affected by the move said those with less than $250,000 in assets were mostly hit.
“They were completely at a loss receiving the letter,” said the broker, who has been trying to pacify furious longtime Wachovia customers.
The broker has started to call some friends who work for other companies to transfer accounts of terminated Wachovia clients. “So far I’ve lost 25 clients, and these are my clients for the past 10 years,” the broker said.
Asking customers to close their accounts is rare. Typically, firms would at least try to accommodate less-affluent clients via a call center, and then leave the decision to the clients whether they want to stick with the firm or not. Morgan Stanley (MS), for instance, last year started servicing foreign account holders with less than $250,000 via call centers rather than individual brokers in the U.S., citing tougher government regulation of non-U.S. accounts.
But Wachovia’s move shows that Wall Street firms’ patience for smaller clients is getting thinner as firms lean more toward fee-based business.
Fee-based business provides firms a steadier source of revenue compared with transactional accounts that pay firms on a per-transaction basis. The fees are tied to the client’s assets – so the bigger the account, the heftier the fees.
In exchange for paying annual fees, clients get more holistic advice on their portfolio instead of simply getting tips on the stock pick of the day from a traditional stock broker.
“It may be unprofitable for the firms to handle small accounts, but it’s unfair that they treat clients this way,” said Jacob Zamansky, a securities lawyer who has dealt with some investors in Latin American countries.
He said clients outside of the U.S. are entitled to the same rights that U.S. investors enjoy and with Wachovia’s plan to shut them down, clients should be given ample time to transfer or liquidate their accounts. Given the shaky market that has devalued a lot of clients’ position, liquidating securities may not be a good option. The best alternative for clients “would be to find another broker and transfer their accounts elsewhere,” Zamansky said.
But finding a new broker doesn’t happen in less than two months, especially during summer when some clients could be on vacation. Zamansky said clients should have been given around four months to find a new broker.
Lawrence Klayman, a securities lawyer at KlaymanToskes who deals with retail brokerage clients outside the U.S., said brokerage firms have a contractual relationship with their clients so they could be terminated by any party anytime. “They are entitled to do their business however they want as long as they are not hurting the client in any way in closing the account,” Klayman said.
Teresa Dougherty, a Wachovia spokeswoman, said the firm has been communicating with its customers concerning their accounts. She declined to comment as to why the firm has decided to terminate some customers or why the firm has suddenly closed its offices in Sao Paolo and Rio de Janiero.
Wachovia closed its Brazilian offices, which both oversaw about $1.4 billion in combined client assets, on June 27. The offices had about 80 employees who serve Brazilian customers holding U.S. accounts.
Some of the financial advisors were fired and others were brought to Montevideo, Uruguay, on short notice. Clients who tried to reach their brokers on June 27 were surprised to be automatically routed to Montevideo.
Some financial advisors say the offices might be subject to a continuing probe by the Federal police regarding firms that are allegedly operating without proper registration, or are helping some wealthy Brazilians evade taxes. Wachovia earlier said it isn’t aware of any government investigation in its Brazilian offices.
To pacify terminated clients, Wachovia is waving its standard transfer fee for those who wish to move their account to another investment firm. But those who will liquidate their position will be subject to customary transaction fees or other charges, expenses or penalties, including potential applicable taxes.
Wachovia also told customers in its letter to discontinue writing checks and to refrain from using any credit or debit/check card that they may have. Any checks written may be returned for insufficient funds, and related charges may apply while card transactions may also be declined.
“At Wachovia Securities LLC in the United States, we take pride in our commitment to deliver the highest quality service to all of our clients,” Wachovia said in its letter to some Brazilian clients. “We sincerely regret to inform you we are no longer able to service your account…We wish you success in your future financial endeavors.”
(Evelyn Juan writes about financial advisors and their jobs, with a particular focus on the transformation of the brokerage business from a transaction-oriented model to fee-based financial advising.)
-By Evelyn Juan, Dow Jones Newswires; 416-306-2025; evelyn.juan@dowjones.com
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