Wirehouses to keep charging clients flat fees -- on their trading activity. The fee-based brokerage account is slated to become a thing of the past in less than a month, but the wirehouses are fighting back. Merrill Lynch and Morgan Stanley aren't giving out any details but both firms hope to introduce new programs that charge brokerage clients fixed fees -- based on their level of trading activity rather than on assets under management.

If launched, these platforms would evade the March 2007 ruling by the U.S. Court of Appeals for the D.C. Circuit, which banned fee-based brokerage programs under the Securities and Exchange Commission's Rule 202.

The new platforms would levy a "fixed commission" tied to a client's trading frequency, rather than a fee that is tied to their asset levels. They would also give clients access to investment vehicles that would be closed to them on an advisory platforms.

Steady

There's something like $300 billion in client assets in fee-based brokerage accounts. Merrill holds around a third of that amount; Morgan Stanley holds $30 billion. The business has been a steady source of revenue, since they churn out a fixed annual fee rather than a commission based on performance.

"The fee-based [brokerage] business is too large to walk away from," James Eccleston, a securities attorney with Chicago-based Shaheen Novoselsky Staat Filipowski & Eccleston, told Dow Jones last week. If the platforms Merrill and Morgan Stanley plan to launch get any traction, he adds, other Wall Street firms are bound to follow suit.

For now though, some of the other big names in brokerage are toying with other strategies. Citigroup's Smith Barney has its SB Advisor platform. UBS has Strategic Advisor. These programs provide access to otherwise-restricted brokerage products -- essentially by running parallel advisory and brokerage accounts for clients.

Smith Barney, which launched SB Advisor in July, already has more than $20 billion across 65,000 accounts on the platform.

Meanwhile third-party investment-platform providers FundQuest and Envestnet are hoping to win business from regional and independent broker-dealers by helping them sort through their options for converting fee-based brokerage accounts to advisory or commission status.

And the workarounds Merrill and Morgan Stanley envisage could run into obstacles. For starters, marketing free financial plans under these programs could contravene the court's decision. And of course the fixed fee could be exploited by brokers who stand to earn more by persuading clients to move into higher trading-frequency brackets. -FWR

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