SHOULD YOUR BROKERAGE ACCOUNT BE FEE-BASED OR COMMISSION BASED?
Lawrence C. Melton, lmelton@dhayeslaw.com
THE HAYES LAW FIRM, www.dhayeslaw.com, 1-866-332-3567 toll free
On Wednesday of this week (Sept. 5, 2007) the Financial Industry Regulatory Authority (FINRA) fined AXA Advisors, LLC, $1.2 million for fee-based account violations. (FINRA News Release: FINRA Fines AXA Advisors $1.2 Million for Fee-Based Account Violations, Orders Return of $1.4 Million in Fees to Approximately 1,800 Customers, 9/5/07). Here is the link to the press release:
http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P036681
FEE-BASED ACCOUNTS--THE BASICS:
- A brokerage account can either be fee-based or commission-based.
- In fee-based accounts, customers are charged an annual fee.
- In commission-based accounts, customers are charged for each transaction.
- If you make a lot of transactions, you should be in a fee-based account.
- If you rarely make any transactions, you should be in a commission-based account.
AXA Advisors offers a fee-based account program called CapAdvantage. The product was for investors with a minimum balance of $50,000. "Buy and hold" investors were not supposed to be placed in CapAdvantage. AXA was supposed to monitor the CapAdvantage accounts. If the customer's account had a low balance or was infrequently traded, the customer should have been moved out of the CapAdvantage fee-based account and into a commission-based account. AXA failed to do this.
FINRA accused AXA of the following:
- AXA allowed investors with less than $50,000 to open CapAdvantage accounts.
- AXA allowed customers to maintain CapAdvantage accounts and pay for those accounts even though they did no trading for years.
- AXA did not generate exception reports targeting fee-based accounts until three years after they had introduced the CapAdvantage product.
- AXA did not have adequate follow-up when monitoring fee-based accounts.
- AXA misrepresented the product----AXA told customers that CapAdvantage accounts would not be charged asset-based fees until the account reached $50,000, the "minimum" account level. In reality, over 1,500 customers were charged fees before reaching the minimum account level of $50,000.
(FINRA News Release 9/5/07).
http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P036681
In addition to the $1.2million fine, FINRA ordered AXA Advisors to return $1.4 million in fees 1,800 customers who were defrauded by the CapAdvantage program. (FINRA News Release 9/5/07).
HISTORY REPEATS ITSELF...
In July of 2007, UBS Financial Services, Inc. agreed to pay a $23.3 million settlement for "inappropriately steering" brokerage customers into fee-based accounts. The NY Attorney General's Office claims that this is the largest settlement in fee-based brokerage account history. The Press Release from the Office of the New York State Attorney General Andrew M. Cuomo is available at http://www.oag.state.ny.us/press/2007/jul/jul16a_07.html
UBS offers a fee-based brokerage account called the InsightOne program. UBS did not have an adequate supervisory system to monitor its fee-based accounts. A lot of the customers in InsightOne accounts, held those accounts for several years without making any trades. Yet they still had to pay an annual fee. UBS should have recognized this and moved those customers into commission based accounts.
On June 21, 2007, the NASD fined Wachovia Securities $2 million for failing to adequately supervise its fee-based brokerage business with respect to its Pilot Plus accounts. See NASD News Release: NASD Fines Wachovia Securities $2 Million for Fee-Based Account Violations, June 21, 2007.
STUDY FINDS WIDE GAP IN ADVISER-CLIENT PERCEPTIONS ON FEE DISCLOSURE...
A recent survey indicates customer confusion on fee structures in the financial advisory business. State Street Advisors and Knowledge@Wharton School of the University of Pennsylvania recently published a report examining the gaps in adviser-client perceptions and best practices for discussing fees.
http://www.ssgafund.com/resources/survey/07EWM_Survey_Public.pdf
The survey found that only 43% of investors understand their financial adviser's fee structure. (See Kathie O'Donnell, Most clients a bit clueless on fees, Investment News, June 8, 2007).
This is unfortunate for two reasons. First, the adviser has a duty to disclose and explain the fee structure to the customer in layman's terms. Second, the customer should make an individual effort to fully understand the fee structure and verify that it is fair and reasonable.
When it comes to fee disclosure, the customer's perception is significantly different from the adviser's perception. 95% of the adviser's surveyed say they discuss their fees with their clients. Only 61% of investors surveyed said their advisers discuss fees with them. (See Kathie O'Donnell, Most clients a bit clueless on fees, Investment News, June 8, 2007).
The Hayes Law Firm, P.C., www.dhayeslaw.com. Our toll free phone number is 1-866-332-3567.
