Investment-platform providers see opportunities in court's recent decision. A couple of third-party investment-platform providers are out to win business from independent and regional broker-dealers faced with converting their fee-based brokerage accounts to advisory or commission status.

Fee-based accounts got traction in the late 1990s as a way to avoid "churning," the process of encouraging clients to trade often in order to trigger commissions. These accounts, for which the client has sole discretion, make sense for active traders: they pay a fee based on account assets, not trades. But they can end up being more expensive than commission-based accounts for clients who trade infrequently.

Discontent

And it seems that some brokers steered infrequent traders into fee-based brokerage accounts as way to make easy annuity streams. Late last year New York attorney general, now governor, Eliot Spitzer sued UBS for exactly that. Raymond James fell afoul of the NASD for something similar a few years ago.

What brought fee-based brokerage accounts down was another issue, however. In 2004, the Financial Planning Association (FPA) brought the lawsuit against the Securities and Exchange Commission (SEC) for letting brokers provide advisory services connected with these accounts without registering as investment advisors under the 1940 Investment Advisers Act.

Late in March this year, the U.S. Court of Appeals for the District of Columbia Circuit sided with the FPA and overturned the SEC rule -- largely on the grounds that the SEC has no right to set aside the 1940 Act to suit the requirements of the brokerage industry.

Last month, to most people's surprise, the SEC said it wouldn't appeal the decision -- and asked the court for four-month stay of its decision to give investors and brokers time to comply.

The court's decision affects about 1 million fee-based brokerage accounts holding an estimated $300 billion.

Thorns

The court hasn't responded to the SEC yet, but four months isn't much time, according to Brian Corkery, head of institutional sales at Boston-based third-party platform provider FundQuest -- though he adds that "the court wouldn't likely punish those making best efforts" at deadline.

Worse than the time-crunch though, the process of conversion could disrupt relationships between broker-dealers and registered reps on one hand and registered reps and their clients on the other.

In effect, broker-dealers have two choices. They can convert their fee-based accounts to commission accounts or they can convert them to advisory accounts. (A third option, farming the accounts out to non-proprietary RIAs and keeping the client relationship, isn't apt to get much traction.)

Converting accounts to commission status is thorny. "It's counter-intuitive," says Corkery. "You're asking people to give up an 'annuitized' revenue stream for a choppy revenue stream based on commissions."

That leaves converting the accounts to advisory status. That's still a disruptive process, but one the wirehouses -- home to about three quarters of all fee-based brokerage accounts -- are in fairly good shape to accomplish. They have in-house RIAs and they're equipped to train brokers for the investment advisor representative (IAR) licenses they need to sell advisory accounts.

But regional and independent broker-dealers, with about $75 billion in fee-based brokerage accounts, are in a tighter spot.

Ways out

That's where FundQuest and its rival Envestnet Asset Management come in. The investment-platform providers out with services meant to independent broker-dealers convert their fee-based brokerage accounts.

"There is now a lot at stake for any firm with fee-based brokerage accounts," says chairman FundQuest Bob Del Col. "In response, we have assembled a team with expertise in compliance, operations, technology, advisor training, and investment due diligence who can consult on a conversion plan and assist with operational execution to ensure successful account conversions."

Chicago-based Envestnet, meanwhile, is taking a more focused approach to the problem facing independent broker-dealers and their reps by touting its "Advisor as Portfolio Manager" capability, which gives brokers the option of managing asset-allocation models -- ones either of their own devising or pre-set by Envestnet -- or across multiple accounts.

"Advisor as [Portfolio Manager] provides robust portfolio management, model-based tools, comprehensive reporting and billing capabilities," says Envestnet's president Bill Crager. "The advisor creates the investment models and manages a basket of mutual funds or securities in a step between [a fee-based brokerage account] and a managed solution" such as a separately managed account (SMA), he adds.

Envestnet has around $40 billion in assets under management and administration; about $6 billion in its Advisor as Portfolio Manager program.

FundQuest is a wholly owned subsidiary of BNP Paribas. It has $36 billion in assets under management and administration in its combined U.S. and European operations. -FWR

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