Hike in Brokerage Fees Likely to Spur Fallout : Wall Street: Charges cover multitude of items on top of commissions. Discounters expected to gain customers.

Wall Street brokerage firms, buoyed by rising investor interest in stocks, are hiking fees aggressively. Such moves, which are expected to continue, could drive more investors to discount brokerages, some experts say.

Shearson Lehman Bros., the nation’s second-largest brokerage, said Wednesday that it will boost its postage and handling fees by 35%, starting Friday. The New York-based brokerage, which boasts more than 4 million customer accounts, said anyone who buys or sells a stock or bond will incur a $3.85 charge per confirmation statement to defray the cost of processing and mailing them. The charge now is $2.85.

Shearson’s action closely follows revelations that Merrill Lynch & Co. has instituted a controversial $40 “active” annual account fee that hits anyone who trades stocks and bonds.

Both Shearson and Merrill note that these new charges come on top of regular brokerage commissions. Commissions at a full-service house, such as Merrill or Shearson, cost an average of $218 per $5,000 trade, according to a recent study by Mercer Inc., a New York-based publishing house that prepares annual surveys on brokerage fees.

The brokerages said the rising fees are needed to cover rising costs. And they make no promises that the fee hikes will end anytime soon.

“When all is said, account fees still don’t fully offset the cost of providing these services,” said Fred Yager, a spokesman for Merrill Lynch.

Added a Shearson spokesman: “It costs the firm an inordinate amount of money to maintain a quality product and quality services. We need to cover our costs.”

However, these fee increases seem to be part of an accelerating trend that can significantly boost the cost of investing for individuals.

“There’s a trend toward these toll-type charges,” said John Markese, president of the American Assn. of Individual Investors in Chicago.

In the past year, Merrill Lynch has also instituted a new $15 fee to provide consumers with stock certificates. Shearson added a $50 “safekeeping” fee for anyone who wants their stocks and bonds kept in Shearson’s vault, as well as a $30 fee for legally transferring securities.

Meanwhile, Dean Witter launched a new $50 inactive account fee this January. And Prudential Securities nearly doubled its postage and handling fee earlier this year.

Such fees hit small investors hardest because they amount to a greater portion of their portfolios, Markese added. An investor with a $5,000 account, for example, will find that just one annual $50 fee eats up roughly 1% of their account value each year.

“Brokerage firms are going the way of the banks, trying to catch you at every corner,” said Ralph Whitworth, executive director of the United Shareholders Assn. in Washington. “They charge you a little here and a little there. All the charges seem to be minor. But when you look at it together, you realize that total costs have really gone up.”

Such fees can boost profitability at financial services firms that have long complained that their small customers have been subsidized by bigger accounts, added Michael Heffer, senior staff member at Consumer Action in San Francisco.

Heffer, who also likens the fee-boosting frenzy in the securities industry to what’s been going on in the banking industry for the past half a dozen years, noted that banks “discovered that their small accounts were a veritable gold mine of fees.”

“It is almost surprising that it’s taken securities firms so long to catch on,” Heffer said.

One thing that may have helped keep brokerage fees in check has been the tremendous success of discount brokers, Heffer added. Discounters, who charge only a fraction of the commissions charged by full-service brokers such as Shearson and Merrill, have been stealing market share from the big brokerage houses over the past several years.

Some believe that the trend toward rising fees may push even more customers to discounters in the future.

“I’d be interested to see if this doesn’t just push more business to the discounters,” Markese said. “A lot of investors might just get honked off because they figure they’re doing a lot of business with these companies and generate substantial commissions. Why should they have to pay just to maintain an account?”

Discount houses now charge about $99 per $5,000 trade versus the $218 average at a full-service brokerage, according to Mark Coler, president of Mercer Inc. Deep discounters charge even less--an average of $56 per trade, he added.