Press Room

JulMay 16, 2007
Morgan Stanley To Roll Out Fee-Based Advisory Program
By Evelyn Juan of Dow Jones Newswires
 
NEW YORK (Dow Jones)- Morgan Stanley (MS) is rolling out a new non-discretionary, fee-based advisory program to help its almost 8,000 brokers deal with a court ruling adverse to fee-based brokerage accounts.

The new advisory account, to be opened by the end of the year, will be offered as an alternative to fee-based brokerage accounts. The new program is expected to offer comprehensive financial advice to clients for a fee, unlike the old fee-based brokerage program that charges fees in lieu of brokerage commissions. The advice clients received was deemed "incidental" and not comprehensive.

Clients in the old fee-based brokerage accounts will be switched to traditional brokerage programs or to fee-based advisory accounts after the 120-day transition period sought by the U.S. Securities and Exchange Commission.

"If we can accelerate it, we will," said a Morgan Stanley spokesman who confirmed the creation of the new nondiscretionary advisory account.

Nondiscretionary accounts require brokers to seek permission from their clients when making investment decisions. Discretionary accounts, on the other hand, allow third-party money managers or financial advisors who are also registered as investment advisors to make investment decisions on their clients' behalf.

Morgan Stanley currently has traditional commission-based brokerage account and discretionary fee-based advisory programs as alternatives to the Morgan Stanley Choice and Private Wealth Management Non-Discretionary Fee-Based accounts, which will be phased out.

Rival firms such as Citigroup Inc. (C) unit Smith Barney and Merrill Lynch & Co. (MER) have long offered both discretionary and nondiscretionary fee-based advisory programs as alternatives to brokerage accounts. For several years, Wall Street firms have been switching clients to comprehensive fee-based advisory accounts, which are unaffected by the court ruling. Of the major wirehouses' fee-based accounts—known as the "annuitized business" because it generates steady revenue independent of trading activity—comprehensive advice programs now hold a majority of the assets.

Fee-based brokerage clients, who pay an annual fee for an unlimited number of transactions, can obtain advice from brokers on whether to buy, hold or sell a stock. But brokers need to seek permission from clients when deciding on a trade.

"By and large, fee-based brokerage clients are nondiscretionary—so why would they go discretionary at this time?" said Chip Roame, managing principal at Tiburon Strategic Advisors, a consulting firm for financial services firms.

Roame estimated that up to 95% of these brokerage clients could switch to nondiscretionary fee-based advisory accounts. Industry estimates indicate there are about one million investors with nearly $300 billion in assets in these accounts. Morgan Stanley alone has roughly $40 billion. "Morgan Stanley may be late in the game but they've got to do what they've got to do," Roame said.

Morgan Stanley's move to rush out a new alternative to its fee-based brokerage platform underscores how firms are now scrambling to cope with a recent court decision.

The U.S. Court of Appeals for the D.C. Circuit overturned a rule that allowed firms to offer fee-based brokerage accounts without being subject to the Investment Advisers Act of 1940, which holds investment advisors to a fiduciary standard of care for clients, placing their interest first. Brokers typically have had to meet a lesser standard of selling appropriate products to clients.

The SEC, which had been sued by the Financial Planning Association, this week sought a 120-day postponement of the court ruling to give firms time to switch their clients' accounts.

Brokers at major wirehouses such as Morgan Stanley and Smith Barney have started to discuss with affected clients several options for the transition. UBS AG's (UBS) retail brokerage firm in the U.S. proactively discussed with brokers last week potential options in light of the ruling.

The transition choices are pretty limited: either switch accounts to the traditional brokerage account in which clients pay firms per transaction, or to a fee-based advisory accounts that could either be non-discretionary or discretionary.

Both discretionary and non-discretionary fee-based advisory accounts require brokers to meet fiduciary duties and disclosure requirements outlined by the rigorous requirements of the Investment Advisers Act.

However, brokers who have discretion over clients' accounts typically use external investment managers who make independent decisions over the client's portfolio. The fees paid by the client are split with the outside managers.

"When the firm is not farming out those assets to a third party, they are more prone to direct liability," said Lawrence Klayman, who represents several clients that sued major Wall Street firms over fee-based brokerage programs, also called "wrap accounts".

As the challenge for brokers now turns to converting fee-based brokerage clients, Klayman said brokers "should put fiduciary responsibility with the clients above their firm's profitability."