Posted by: Aaron Pressman on December 12, 2006
Eliot Spitzer has a new racket he’s chasing down on Wall Street, charging that UBS put some customers in unsuitable fee-based brokerage accounts. He’s late to the party as the SEC, NASD and NYSE have been on this one for more than a year, as I wrote back in May, 2005. But it’s worth reviewing the issue to ensure you’re in an account that best suits your investing habits.
Most brokerage accounts levy little or nothing in the way of maintenance fees but charge commissions on trades, commissions that have been getting cheaper and cheaper. But a growing trend places customers in so-called fee-based accounts where little or nothing is charged for trades but annual or quarterly fees are levied as a percentage of assets. Great for rapid traders but no so great for mom and pop, buy and hold investors, especially those who favor no-load mutual funds (and most brokerage firms exclude rapid traders from their fee-based accounts).
So who dreamed up these fee-based accounts? In the bad old days of Wall Street, say 1990, the most common problem afflicting widows and orphans was called churning. That was when an unscrupulous broker traded in and out of stocks in an account just to generate big commissions for him or herself. About 10 years ago, the street formally looked for ways to clean up its act. A task force headed by former Merrill Lynch Chairman Daniel P. Tully examined broker compensation policies and recommended, among other things, that a switch to fee-based accounts would eliminate the incentive to churn. And that seems to have been the case as churning complaints dropped considerably.
The dark side, of course, was that some people would have been better off in an old-fashioned commission-based account because they didn’t trade much. In the Spitzer filing against UBS, he cites the example of a 91-year-old customer who made four trades in two years but paid $35,000 in fees versus about $2,000 that would have been paid under a traditional account structure. Ouch. Another customer paid $24,000 while only making a single trade. It’s worth checking all the options when a broker comes knocking offering to switch you into a “better” account.
And of course, don’t forget that UBS says in this case it has done nothing wrong and that its clients in fee-based accounts have actually saved money.