Only thirteen months ago, Merrill Lynch announced the impending end of brokerage as it has been known for generations. The "customers man", the person who bought and sold stocks and bonds for a commission, was going to be replaced by an advisor. Instead of working for commissions, your new consultant would earn his keep by charging a percentage of the assets under management. The old conflict of interest between client and broker was about to become history.

When Merrill Lynch made their announcement on October 17, 1996 they were not certain how much the charge would be. Industry sources speculated it would be 1 to 1.5 percent of assets under management… plus the expenses of the underlying mutual funds. All that was certain was that Merrill, the nations' largest retail brokerage firm, had seen the writing on the wall: traditional brokerage was losing share to a brave new world of financial planners and advisors.

Now, one year later, the entire brokerage industry has transformed itself from brokers to consultants. Now, whether you are dealing with Merrill, Prudential, Smith Barney, or American Express, you will find yourself being offered a relationship that is based on assets in your account rather than commissions for sales. The invisible revolution started by Charles Schwab in April, 1987--- less than a decade ago--- is the new paradigm for the securities industry.

According to Eli Neusner, a consultant with Cerulli Associates in Boston, there is great variety in how the new arrangements are packaged… but they usually come down to an annual cost, to the client, that totals about 3 percent a year.

Which brings us to a rude question: is that too much?

Very likely. Mr. Neusner observes that "there is already a counter movement ( to excessive packaging) in things like the Motley Fool. They're taking the approach that it doesn't make sense to pay for a mutual fund… and then pay more for it." A Cerulli Associates report issued last summer cautioned the industry that the fastest growing segment--- programs that "wrapped" mutual funds--- also had the most to prove. "It is our view that mutual fund wrap sponsors will increasingly need to demonstrate the ongoing as well as the up-front value of their services in light of the increased scrutiny over pricing."

I'll be less circumspect: You can't pay 3 percent in fees and expect to have an attractive long term return.

A familiar message, you say? OK, then forget what I say. You've known for years that I am incurably cheap, the kind of mean spirited person who doesn't care if your broker misses his Mercedes payment.

Consider, instead, the work of one William J. Bernstein, a Portland, Oregon neurologist who is bright enough to consider modern portfolio theory, optimization, and multiple regression analysis a fun hobby. Dr. Bernstein is also the sole proprietor of "Efficient Frontier, An Online Journal of Practical Asset Allocation." This electronic publication appears on the World Wide Web at "http://mail.coos.or.us/~wbern/"

So far, "Efficient Frontier" is a one-man band kind of thing since it is produced, written, and directed by the good doctor. But that's OK and there is one article that should be required reading by every struggling investor in America.

It's called "Bequeathing Your assets to Your Broker."

It begins with the old joke of the young broker asking the senior partner what his proudest accomplishment was. The senior partner replies: "Over the years I've gradually transferred the assets of my clients to my own name."

Then Dr. Bernstein shows that in real life, unlike the joke, the transfer is easily accomplished by taking a hefty share of an investors return. Here's how it works:

Bernstein assumes that you had the good fortune to inherit $100,000 at age 25 and invest it with an average stock broker who, in turn, invests it in a 50/50 mix of stocks and bonds. Over the years you receive an expected average gross return of 8 percent but pay out 3 percent for a "wrap" fee or some other fee arrangement, leaving you with a 5 percent net return.

Your broker, meanwhile, takes the 3 percent income stream and invests it at 8 percent and enjoys the full return, not having to deal with fees and commissions. Dr. Bernstein shows that the broker will have an investment account that is as large as yours in 24 years. When you retire at age 65 you will have $704,000… but your broker will have $1,542,000.

The point here isn't that brokers are villains. They aren't. But however the subject is "wrapped", it always come down to a simple matter: whose money, whose return?


File Name: 961117SUDallas Morning News file date: 11/17/96---SUNUniversal Press Syndicate file date: same

 © Dallas Morning News, Universal Press Syndicate, 1996