What Worries Your Broker? This Should Scare You!

“There are two things I worry about: Clients dying and the government putting me out of business,” said a Merrill Lynch rep who says he gets about 80% of his revenue from B-shares shares and fee-based business. Apparently, the safety of his clients’ assets must be down the list.

Meanwhile, regulators are currently engaged in a crackdown on brokers who shove clients into B-shares when the breakpoints of A-shares are much more appropriate, and those who use wrap accounts then ignore their clients. Hundreds of millions of mutual fund load refunds have been ordered. It has been discoverd that some clients have paid $5,000 to $20,000 per transaction while ignored in fee-based accounts at major firms.

Loss of the fees “would make me wonder whether I should stay in business,” said Curtis Mohr, a Pasco, Wash., broker affiliated with Royal Alliance Associates Inc. Good riddance!

“I’m in trouble” if 12(b)-1 fees are eliminated, said Graham Parsons, an Erie, Pa.-based rep affiliated with LPL Financial Services. “I’ve had sleepless nights over this….They could literally legislate me out of business!” Worth considering. How much sleep has he lost over retirees who may be paying 20% of their income to him and his firm?

The total expense ratio on C-chares is 1.95%, according to Lipper Inc. of New York. Annual B-Share costs are about the same. Fees for separately managed accounts, which are all-inclusive, average 1.68%, according to a consumer group. Unless the assets of diversified portfolios consistently earn 9% (which has never happened over any 10 year period) 20% or more of these clients’ earnings are going to the house!

Thus, if one worked for 40 years to save a half million dollars to retire and put to work at an average of 8%, that person would earn $40,000 – less about a $10,000 haircut to the investment community, leaving the retiree $30,000. One-fourth – 10 years – of the retiree’s work went to pay others, including an advisor who lays awake nights thinking he is a victim.

“The 12(b)-1 fee structure … allows advisers to have relationships with lots of small accounts,” Mr. Nachmany said. An adviser doesn’t “have to be a collection agent.” “12(b)-1s make it easy to sit down with the little guy,” Mr. Mohr said. Changing the current system of 12(b)-1 fees will force brokers to evaluate what they charge each client, Mr. Nachmany said. “The market will tell them they’d be right to charge more than they’re charging now,” he said, and as a result, some small accounts might be dumped.

Such statements need no comment. As a group, stockbrokers earn more than Doctors, Lawyers, CPA’s and Engineers. No special degree is needed, in fact, not even a high school diploma is required to become licensed as a stockbroker, mutual fund or annuity salesperson.

Shepherd Smith and Edwards represents investors nationwide in claims against members of the securities industry. We have represented investors in more than 1,000 securities cases. To learn whether we are able to assist you with a claim contact us to arrange a free consultation with one of our attorneys.