As Firms Push Customers to No-Frill Advisors, Alarm Bells Ring
(Corrects 18th paragraph to describe Paul Meyer as a litigation consultant, not a lawyer.)
When Merrill Lynch management told Atlanta broker Kim Aylesworth to toss about one-third of her client base to the wirehouse’s discount brokerage platform Merrill Edge, she resisted.
The clients—many of whom were young professionals—would end up having to deal by phone, in most cases, with faceless and randomly chosen brokers who she believed could not provide the personalized service that they deserved, she said.
They and she were becoming victim, in her mind, to Merrill’s decision in 2012 to raise the minimum household account size on which it pays brokers to $250,000 from the previous $100,000 floor. Merrill initially “grandfathered” customers under the limit, but has ended payments as well as revenue credit on the firm’s payout grid to most brokers for even those accounts. (Brokers with at least 80% of customer accounts above the $250,000 threshold qualify for a token-like 20% payout on the small accounts, or about half of their average payout percentage.)
“They were telling me for a year [to transfer] but I wouldn’t do it,” said Aylesworth, who left in mid-2013 for Morgan Stanley, which had a similar but less restrictive policy on “small” accounts. Of her 100 clients at Merrill, 29 were tagged to be moved to Merrill Edge, she said.
Aylesworth departed Morgan Stanley last year and is no longer registered with a firm, but many brokers share her concerns. Minimum account pay policies are short-sighted because they sever relationships with small clients who can mature into larger ones and are discriminatory to both clients and brokers in less affluent communities, they say.
Firms respond that they have multiple channels that provide service, relationship and compensation levels appropriate to customer and advisor needs.
“We believe that clients with assets below $250,000 are better served through Edge — but FA’s are not required to transfer accounts below this threshold,” a spokeswoman wrote in an email. “It’s a business decision on the part of the FA.”
In other words, the firm is fine with brokers willing to work for free (although managers who get paid on branch production may not be).
While the push-pull between brokers and firms over client relationships is nothing new, regulators are concerned about the growing use of lower-service call centers for customers.
In an Investor Alert issued last month, the Financial Industry Regulatory Authority warned that customers failing to meet activity, portfolio size or asset minimums are increasingly being transferred without consent to so-called advisory centers and are losing access to an individual assigned broker.
Brokers in advisory centers often are incentivized to sell certain products and paid bonuses to increase account sizes — in contrast to traditional call center employees who passively respond to customer questions and take orders, the alert said. It raised concerns ranging from “aggressive sales tactics that can be different from the type of relationship the customer had experienced before being moved” through misrepresentations and omissions of key information about investment products and activities like mutual fund switches to inadequate supervision.
The alert was not motivated by any particular firm’s advisory-center activities or by an ongoing investigation, but by a staffer’s realization that an earlier alert about conventional call centers had not been updated since 2010, said Finra spokeswoman Angelita Williams.
Advisory centers have proliferated since then as firms have adopted more sophisticated segmentation policies. Merrill accelerated the movement away from full-service advice this year by eliminating commission-based retirement accounts as part of its new fiduciary rule policies. Brokers were told to move clients in such accounts to an asset-based fee relationship, to Merrill Edge or to abandon them.
“We work with clients to ensure they get to the right place,” the firm’s spokeswoman wrote. “We have a thorough and well-designed program in place to ensure any transfers result in a good experience for clients.”
Morgan Stanley, UBS Financial Services and Wells Fargo Advisors, Merrill’s chief competitors, have been less restrictive but still penalize brokers for servicing small accounts. Wells this year raised its minimum household account size to $100,000 from $65,000, while UBS and Morgan Stanley have been at the $100,000 minimum for several years. UBS this year permitted brokers to get grid credit on accounts that don’t qualify for payouts, as does Morgan Stanley.
Rising minimum account limits are understandable because brokerage firms “can’t make any money on servicing smaller accounts,” said Christopher Babel, a plaintiff’s lawyer and former enforcement attorney at the National Association of Securities Dealers and the Securities and Exchange Commission.
But firms must then live with the public relations headache of “telling customers that their accounts are so little of value that they’re inconsequential,” the Houston-based lawyer said.
Paul Meyer, a former Smith Barney broker who now works as a plaintiffs’ expert witness at Securities Litigation Consulting Group, said customer complaints about advisory-center and call-center services are growing and go beyond the large wirehouses.
Bank of America launched Merrill Edge in 2010 to serve so-called mass affluent investors online, by phone and at some branch offices. Originally part of the Merrill wealth unit, the company moved it within the bank and services clients through some 2,000 registered brokers, including 800 “financial solution advisors” at the bank’s “advisory center.”
In its Investor Alert, Finra advises customers who are notified of transfer to a call or advisory center to be aggressive in questioning firms. They should ask whether they can work with a designated rep at a center, whether products and services will be more limited than when working with a full-service broker and how much they will pay in commissions and fees.
“Remember, you can also transfer your account if you feel that you are not receiving the quality of service that you feel is best for you,” the alert says.