Fee for Brokerage Accounts Ended

The U.S. Securities and Exchange Commission dealt a final blow to fee for brokerage accounts on May 14, 2007, when it announced it would not appeal the ruling of the U.S. Court of Appeals for the District of Columbia Circuit in Financial Planning Association v. SEC. The SEC stated it will instead ask the court for a four-month delay in order to work with individual brokerage firms and investors to respond to the court decision.

In the near future, the brokerage industry will need to address the investment needs of nearly a million fee-based accounts, with an estimated portfolio value of $300 billion. As a part of the transition, the account holders of fee for brokerage accounts could be forced to choose between a conventional brokerage account or advisory services. SEC officials say they want to avoid disruptions to customers who hold those accounts, while providing customers of the firms with the information and time they need to determine the appropriate form of securities services for them. However, this action comes at a time when investors are clearly confused as to the line between brokerage and investment advisory services. This is evidenced by the survey recently issued by the Consumer Federation of America which reflected that fewer than one-third of US investors understand the broker's primary service is buying and selling securities, not investment advice.

There is also an irony in the timing of the holding of the appeal court. The SEC had previously commissioned a study by the RAND Corporation to identify needed improvements in regulatory and legislative rules that date back to the 1930s with respect to the marketing, sale, and delivery of financial products and services to investors. That study, which has been accelerated because of the current situation, will be issued by December 2007, after major decisions have been made and implemented by brokerage firms with fee for brokerage investment platforms.

With the question of the survivability clearly answered, the only remaining issue will be how fees for brokerage accounts are transitioned. The Commission did state that it will work with individual brokerage firms during the transition period, but there have been no clear guidelines issued, other than the commitment to obtain the four-month extension for the brokerage industry to rollout alternative investment platforms. MGL Consulting Corporation anticipates that while the SEC should take prompt action in providing direction to the brokerage industry, firms should be proactive and start analyzing their alternatives with respect to the current fee for brokerage platforms. This includes deciding whether to transition the respective accounts to traditional brokerage accounts and or to advisory platforms.