Smaller Investors Are Being Hit With Bigger Charges by Brokerages
Whether it is through a 50% hike in “processing and handling” charges or through newly initiated “custodial” fees, if you have an account at a brokerage firm, chances are you’re paying a lot more today than you did five years ago. And things are about to get even more costly.
Over the next few months, Merrill Lynch, the nation’s largest brokerage firm, plans to hike fees for a number of customer transactions and initiate a new $15 charge for sending out stock certificates. Other big investment houses say they may follow suit.
Meanwhile, Dean Witter Reynolds, which handles a lot of smaller accounts, plans to institute a $50 inactive account fee next January.
And brokerage firms across the country continue to look for ways to institute or raise fees and charges as a way of increasing and stabilizing their own company’s earnings. And they do this at the expense of the individual investor, because big investors refuse to pay.
Already consumers are feeling the pinch. Although industry insiders will not release statistics that delineate exactly how much more small investors are paying, an informal survey of five of the nation’s biggest consumer brokerages gives an indication.
In the past five years, Merrill Lynch, Smith Barney Harris Upham & Co. and Paine Webber have all instituted new fees on inactive accounts. These fees range from a low of $40 at Merrill to the industry standard of $50 at the other two houses. Shearson Lehman Bros., meanwhile, simply raised its fee to $50 from $30 over the period.
Three of these five firms--Shearson, Dean Witter and Paine Webber--also instituted new charges for “processing and handling” that range from $2.30 to $2.85 per transaction. The other two brokerage firms essentially doubled their charges for this service.
Annual fees for individual retirement accounts and cash management accounts also have shot up at various firms. Smith Barney, for example, now charges $40 for handling customer IRAs versus only $25 in 1986. And Merrill Lynch plans to boost the charge on its basic cash management account to $100 in late August. These accounts now cost $80 at Merrill; the annual charge was $65 five years ago.
Although this trend toward higher customer levies is gaining steam, it is by no means new. At a securities industry conference two years ago, the hot topic of discussion was how and when to raise fees. Nearly everyone in a 100-member focus group acknowledged at the time that they were already hiking charges on smaller accounts.
The reason is simple. Ever since the stock market crash of 1987, brokerage firms have been suffering with decreased commission income. Commission revenues revived a bit this year thanks to a postwar bull market. But industry experts maintain that a four-year securities industry slump has persuaded investment houses that they need to find ways to keep income steady even when the stock market is sour.
Brokerages can’t turn to their biggest customers--institutional investors--for the needed income either. These institutions, aided by computerized trading, find they need their brokerage houses less and less. That keeps the competitive pressures at a fever pitch. And it keeps brokers’ profit margins for institutional business wafer thin.
Additionally, big customers have proven to be “highly sensitive” to price hikes, regardless of how subtle those increases might be.
On the other hand, individuals accept the price increases with a minimum of griping and shopping around, industry insiders say.
“Our internal research says that our clients are more interested in the quality of service and the financial strength of the provider than they are about commissions or fees,” said Fred Yager, a Merrill Lynch spokesman.
Of course, no one pretends that customers like higher fees. But most people don’t close their accounts because of them, and that’s what is required if consumers hope to stem the trend, industry experts say.
However, some brokerage firms maintain there is a bright side to the rising fees. While hiking charges, some investment houses say they are changing in-house strategies to shift broker attention from generating commission income to providing quality service.
Some companies say they are already changing compensation schedules to pay brokers for what amounts to keeping their customers happy. That’s a switch from the current system, in which brokers essentially get paid when their customers buy and sell securities.
If this shift becomes widespread, it might translate into better service for individuals. Brokers may become more apt to ensure that stock trades get done at the best price and that customers don’t buy products that are poorly suited to their investment objectives.
Nevertheless, consumers should be aware of the fees and factor them into their buying decisions. You shouldn’t avoid a brokerage firm just because its fees are rising. But if another firm charges less and provides equal or better service and comparable investment returns, it might make sense to switch.
Brokerage Blues
If you have an account at a brokerage, chances are you’re paying a lot more today than you did five years ago.
Inactive Account Fees
Company Today 1986 Merrill Lynch $40 0 Shearson $50 $30 Dean Witter 0* 0 Smith Barney $50 0 Paine Webber $50 0
*The firm plans to institute a $50 charge starting in January.
Processing and handling fees
Company Today 1986 Merrill Lynch $4.85 $1.85 Shearson $2.85 0 Dean Witter* $2.35 0 Smith Barney $2.50 $1.70 Paine Webber $2.30 0
*Applies only to certain accounts
