May 9, 2007
By Evelyn Juan
Dow Jones Newswires
NEW YORK — UBS Wealth Management US has told its almost 8,000 brokers that it might scrap InsightOne, its fee-based brokerage program, following a recent court ruling adverse to fee-based brokerage programs.
While no final decision has been made yet, officials at the UBS AG (UBS) unit discussed the possible shutdown, which would affect some 80,000 clients, in a nationwide conference call with brokers Tuesday. InsightOne is also under investigation by the New York attorney general’s office.
The move could mean converting some of the InsightOne clients into a traditional brokerage account that charges customers on a per-trade basis instead of an annual fee for an unlimited number of transactions, said people who have been briefed about UBS’s options.
Brokers could also move clients into fee-based advisory programs such as Strategic Advisor or ACCESS, in which financial advisors have a fiduciary relationship with clients and are guided by the Investment Advisers Act.
“We have discussed several options for our InsightOne clients, one of which is transitioning all those accounts to different programs,” said Karina Byrne, a UBS spokeswoman.
Byrne stressed that the firm has not made a decision to shut down InsightOne given the U.S. Securities and Exchange Commission’s May 14 deadline to appeal the court’s March ruling.
“We are waiting for guidance from the SEC and, until that time, all InsightOne accounts continue to operate,” Byrne said. UBS wouldn’t divulge the value of InsightOne’s client assets.
“Merrill Lynch Rule” Reversal
UBS is so far the first major Wall Street firm that has openly explored its options amid a reversal of the “Merrill Lynch rule” that allowed brokers to offer fee-based services to brokerage customers without being regulated as advisors. Such programs are also called wrap accounts.
The U.S. Court of Appeals for the D.C. Circuit in March overturned the rule, saying regulators overstepped their authority in exempting fee-based brokerage programs from the stringent requirements of the Investment Advisers Act. The court sided with the Financial Planning Association, which sued the SEC over the rule.
The Securities Industry and Financial Markets Association (SIFMA), a trade group representing more than 650 securities firms, has urged regulators to appeal the decision, arguing that it could hurt about one million investors with nearly $300 billion in assets.
Merrill Lynch & Co. (MER) alone, the largest retail brokerage house in the U.S., has about $100 billion in assets under this program, according to a major competitor who didn’t want to be identified.
Citigroup Inc. (C) unit Smith Barney, the second largest retail broker after Merrill, has about $20 billion in these accounts.
“We anticipated this decision and created SB ADVISOR in 2005,” said Citigroup spokesman Alex Samuelson, referring to Smith Barney’s non-discretionary fee-based advisory platform. He declined to comment on the firm’s options should the SEC fail to appeal, and so did spokesmen at Merrill and Morgan Stanley (MS).
Brokerage firms can continue offering the program until the case is resolved if the SEC files an appeal by Monday.
“Solely Incidental” Advice
In fee-based advisory programs, which are subject to the Investment Advisers Act of 1940, clients pay a flat fee for comprehensive financial advice.
In wrap accounts, clients also pay an annual fee tied to their level of assets in lieu of commissions. Brokers in these programs, however, don’t have a fiduciary duty to clients as they have in fee-based advisory programs. The financial advice that brokers could offer these clients had to be “solely incidental” to their brokerage business, and brokers could not earn any special compensation for it.
For the past several years, most Wall Street firms have been transitioning their fee-based brokerage clients into advisory accounts to limit potential liability from the legally tricky commission-replacement programs or wrap accounts.
Former New York Attorney General Eliot Spitzer last December sued UBS for allegedly putting clients in unsuitable wrap accounts that resulted in tens of millions of dollars in unnecessary fees paid by clients who traded infrequently. UBS denied the allegations of Spitzer, now the Governor of New York, and declined to settle the suit for $150 million. The suit, filed in New York State Supreme Court in Manhattan, is still pending.
“If they’ll make the proper disclosure to the clients that advice is incidental all along, they’d make themselves look like liars,” said Lawrence Klayman, who represents several clients who filed arbitration claims against UBS, Merrill, Morgan Stanley, and other firms related to wrap-fee accounts.
Wrap-account clients were led to believe that they were paying for advice as clients of a full-service brokerage firm, when the advice was merely incidental, said Klayman. “Rather than throw eggs on their face, they’ll just terminate the account.”