Another regulatory situation has been brewing in the US for some time and it seems to be an odd thing to be fighting over. Fee based accounts are essentially brokerage accounts that pay a fixed percentage of the assets in the account as a commission. So if you are a frequent trader the account makes sense as after a certain point it is effectively commission free.
The problems occur, however, when clients in those accounts do not trade frequently and are therefore paying more in commission than they would be in a commission based account.
Morgan Stanley were fined $6.1mn in 2005, AXA were fined this month and others have been fined along the way.
The regulators have a problem with these accounts because they believe that clients accounts should be monitored to see if they are trading enough to make the fees acceptable and, basically, cheaper than a commission based account. OK, that's fine, but the alternative looks to be a nightmare waiting to happen.
Companies are now axing their fee-based accounts in favour of commission based accounts so the choice is becoming less. Now look at it from a brokers point of view. If you have $50mn under management on a 1% fee base to the company you work for and you get 30% commission you will make $150,000 per annum.If you increase these fund by sound advice to $60mn you get a $30,000 pay rise. If this amount now goes to a commission based system you will get a percentage of the trades that are done in the account. Doesn't this then incentivize bad behaviour? Wouldn't an advisor be more inclined to 'churn' trades to generate more commission?
It seems an odd step from the regulators to put pressure on an area like this, because in 1995 they were saying that these accounts were the best way to go.
I don't know what the solution is but it does seem like a bit of nannying going on again. If someone buys a fast car and leaves it in the garage should the police criticise the car manufacturer for the owner not using it enough? Do the utlity companies get fined if they are charging you more than the alternatives? This is a matter of choice. Yes, I believe that suitability of accoounts should be monitored, but fining a company for not doing it? It is as much the client's responsibilty than it is the company.
I can see where this is going. There will be a case in the not too distant future where some bank gets fined for 'over trading' accounts.
The regulators should really just make their minds up and then keep their noses out because the increased cost of all this regulation and monitoring is just passed onto clients much the same as in any other industry. I know this is the US and doesn't affect us, but it is only a matter of time before some bright spark regulator everywhere decides to start meddling with a system that already works.
I really do dispare with the regulatory situation in our industry. Maybe we should just leave it up to a bunch of geeks with computers trading on the advice of a bunch of ex-regulators.
The problems occur, however, when clients in those accounts do not trade frequently and are therefore paying more in commission than they would be in a commission based account.
Morgan Stanley were fined $6.1mn in 2005, AXA were fined this month and others have been fined along the way.
The regulators have a problem with these accounts because they believe that clients accounts should be monitored to see if they are trading enough to make the fees acceptable and, basically, cheaper than a commission based account. OK, that's fine, but the alternative looks to be a nightmare waiting to happen.
Companies are now axing their fee-based accounts in favour of commission based accounts so the choice is becoming less. Now look at it from a brokers point of view. If you have $50mn under management on a 1% fee base to the company you work for and you get 30% commission you will make $150,000 per annum.If you increase these fund by sound advice to $60mn you get a $30,000 pay rise. If this amount now goes to a commission based system you will get a percentage of the trades that are done in the account. Doesn't this then incentivize bad behaviour? Wouldn't an advisor be more inclined to 'churn' trades to generate more commission?
It seems an odd step from the regulators to put pressure on an area like this, because in 1995 they were saying that these accounts were the best way to go.
I don't know what the solution is but it does seem like a bit of nannying going on again. If someone buys a fast car and leaves it in the garage should the police criticise the car manufacturer for the owner not using it enough? Do the utlity companies get fined if they are charging you more than the alternatives? This is a matter of choice. Yes, I believe that suitability of accoounts should be monitored, but fining a company for not doing it? It is as much the client's responsibilty than it is the company.
I can see where this is going. There will be a case in the not too distant future where some bank gets fined for 'over trading' accounts.
The regulators should really just make their minds up and then keep their noses out because the increased cost of all this regulation and monitoring is just passed onto clients much the same as in any other industry. I know this is the US and doesn't affect us, but it is only a matter of time before some bright spark regulator everywhere decides to start meddling with a system that already works.
I really do dispare with the regulatory situation in our industry. Maybe we should just leave it up to a bunch of geeks with computers trading on the advice of a bunch of ex-regulators.
Is there any wonder that the hedge fund industry exploded to the size it is now, with traders and brokers just wanting to do their job without constant rule changes... Well at least until they bring in some other rule for hedge funds, how about "2 + 20 is too much, and you can only charge 1%" that should be enough to kill off another profitable industry..
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