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Studies In Broker Speak Fee-Based, Wraps, And Other Angels On Pinheads

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Yesterday we posted an item on the looming end of fee based brokerage accounts that involved some confusion about how brokerages use the term "wrap account." We've since corrected the item by simply deleting the term "wrap account," which our brokerage friends tell us is a specialized term that shouldn't be used to refer to just any fee based account.
Wrap Accounts, in the formal language of brokers, are accounts where clients pay for investment advice, and the firms and brokers selling the advice need to be registered investment advisers with the bonding and heightened duties that go with being an investment adviser, according to a broker we spoke to. The non-wrap, fee based accounts had the advantage of charging a fee structure similar to the wrap accounts but could be sold by brokers who were not also registered investment advisers.
"The 'Wrap Account' and 'Fee Based Account' distinction is a narrow one, and could be seen as a distinction without a difference," a ex-broker writes. "When I was a retail broker at Morgan Stanley we were constantly reminded that our asset based fee accounts were not wrap accounts, and that we were not charging our clients for the advice we were giving them. Fee based accounts, or asset based accounts, or asset based fee accounts—I remember all three names being used - were merely a different way of billing for transactions. MSDW (as it was called at that time) called them Choice and we were paid nicely on them."
Of course, this distinction seems to be more of a matter legal formalism than real practice.
More on it anyway, after the jump.

"The truth of the matter is that if you ask any stock broker who is selling equities in old fashioned transactional accounts, he will tell you that the commissions his clients pay are for his advice," the former broker says. "So there is a legal-regulatory difference. In a 'Wrap Account" the fees are for the advice and the transaction. While in a 'Fee Based Account' the fees are for the transaction and the advice is 'incidental to the buying and selling of securities.'"
It was that distinction that the court pulled down earlier this year when it said the SEC had overstepped its authority to exempt brokers from the requirements of the Investment Advisers Act of 1940 for the fee based accounts. And it was apparently largely lost on many investors, who are not necessarily attuned to the nuances of exactly what they are paying for in various types of brokerage accounts. One study commissioned by the SEC found that customers could not well distinguish between the roles of a financial planner, a financial adviser, a financial counselor, a financial analyst, a financial investment counselor or an investment specialist.
The confusion was at the heart of the challenge to the now-defunct SEC rule. The Financial Planners Association, a special interest group representing certified financial planners, broker-dealers, attorneys and bankers, argued the rule hurt consumers and unfairly allowed unqualified brokers to compete with registered advisers and planners without the handicaps and legal duties that burden those considered advisers and planners by the law. Registered investment advisers must disclose conflicts, file with state securities commissions and the SEC and generally act as fiduciaries with a legal obligation to represent clients' interests above their own. Brokers are held to less-stringent standards.
Earlier: The Strange Birth, Growth and Death of Fee Based Brokerage Accounts [DealBreaker]