New York – A letter/advertisement from Bob McCann, President of Merrill Lynch Global Private Client Group, was posted in the Wall Street Journal this morning. The letter is entitled “The Needless Death of Fee-Based Brokerage”. There are two broad ways to pay for brokerage—traditional commissions or a fee-based charge. Arguably, those that are concerned about churning may be more likely to opt for the fee-based brokerage fees.
Merrill has the largest share of the fee-based brokerage business, having about 400,000 accounts worth a total of $100 billion (or about 25% of the total market).
Fee-based accounts were allowable under rule 202 of the Securities and Exchange Commission. This rules deals with the potential fiduciary responsibility of brokers that provide information to their accounts. At issue is whether the advice offered by a broker is “solely incidental” to its brokerage business. If this is the case, then the brokerage firm is not deemed to have fiduciary responsibility to the client and therefore need not be a registered investment advisor.
However, in March of this year, a federal court vacated rule 202, which means that the fee-based brokerage business could be determined to be advisory in nature and require that the brokers are investment advisors with fiduciary responsibilities to their clients.
Rather than risk this outcome, the Street’s expected response—confirmed by the Merrill letter—is to stop offering fee-based accounts altogether.
Since the letter is an advertisement in the print version of the paper, we are unable to present it below. However, we have included the FPA Executive Summary for Rule 202(a)(11)-1 for reference:
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