Forbes, April 12, 2010 (Asher Hawkins)
In 2007 Josephine DesParte, an 88-year-old Chicago widow, had $8 million tucked into an account at William Blair & Co. One-quarter of it was in municipal bond funds and cash and the rest in three stocks dear to her heart: Dun & Bradstreet, DesParte’s longtime employer, and those of spinoffs Moody’s and IMS Health. Together the securities were generating more than $100,000 in annual dividend and interest income.
DesParte’s coupon-clipping strategy made good sense for the widow, but she claims the inactivity made the commission-based account a dud for William Blair. In October 2007 brokers Brian L. Kasal and William H. Ross persuaded DesParte to begin selling her stocks and many of her bonds and to diversify into a number of blue chips.
They also moved her into a wrap account, which, DesParte would later claim, gave William Blair the advantage of shaving off 1.5% of her assets a year, or $120,000, in annual fees. The brokers’ moves further saddled her with a $322,000 capital gains tax bill for 2007, DesParte claimed. DesParte filed a $2 million claim with the Financial Industry Regulatory Authority seeking compensation for wrongful investment losses and taxes. She was awarded $1.1 million last November. William Blair denies wrongdoing and declines comment. The two brokers also deny wrongdoing and have moved to Morgan Stanley.
“We’ve seen a real surge in claims related to fee-based accounts in the last year or so,” says Andrew Stoltmann, DesParte’s attorney. “The overwhelming majority of clients are over the age of 60, and a lot of them are 70- to 80-year-olds. They’ve got large accounts and don’t trade much, which means they’re unprofitable as commission-based clients.”
Fee-based accounts, commonly referred to as wrap accounts, popped up two decades ago as antidotes to churning. A broker earning an annual percentage fee for his firm will presumably not be badgering clients into trading excessively to gin up commissions. But the switch in fees does not eliminate the conflict between the broker’s interests and his clients’. A lot of them would be better off buying and holding than paying either commissions or annual fees.
For brokers and their employers, wraps are something of a holy grail, generating fees that are little affected by trading volume or even whether clients make or lose money. Such advantages for the salesmen may help explain why assets in wrap accounts are up 50% over the past five years to $1.8 trillion, according to Cerulli Associates.
DesParte’s case illustrates the potential pitfalls of wraps. With her, William Blair’s fee schedule called for charging 1.5% annually on equity holdings and 0.35% on bonds, which, Desparte claimed, totaled $85,000 a year, based on her original portfolio. By replacing her munis with equities, DesParte claims Blair hiked its fees by $35,000 a year; Blair contests the amount and says fees did not motivate it. Blair had an additional hidden agenda as “a marketmaker in virtually every equity position purchased,” which meant it stood to earn a bid/ask spread on each transaction, Stoltmann claimed.
What’s an investor to do? For those seeking hand-holding from an investment pro, there are less conflicted, and often cheaper, alternatives than wrap accounts. Independent fee-only financial planners typically charge around 1% annually for giving guidance on both investments and financial decisions like when to start drawing from an IRA or whether to pay down a mortgage. Look for one who custodies assets with a large broker-dealer and invests in low-cost exchange-traded funds or index mutual funds.
Low-cost provider Vanguard Group charges clients with less than $100,000 in its funds $1,000 for a phone consultation, an asset allocation plan and fund recommendations. Investors with $100,000 to $500,000 at Vanguard pay $250 for the same services; those with more receive them at no charge.
The firm will manage assets outright for investors who pony up at least $500,000. It charges 0.75% on the first $1 million, 0.35% on the next $1 million and 0.2% above that level.
The posting on this site are mere OPINIONS and NOT statements of fact in any way whatsoever. The information should not be relied upon and there have been no findings made against the firms or individuals referenced on this site. In addition, this Blog is made available for educational purposes only and incorporates information from the web as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand that there is no attorney client relationship between you and Stoltmann Law Offices (10 S. LaSalle, Suite 3500, CHICAGO, IL 60010, 312.332.4200). The Blog opinions should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. PLEASE NOTE THIS IS ADVERTISING AND IT IS NOT A NEWSPAPER ARTICLE OR POST FROM AN INDEPENDENT OR NON-BIASED, NEWS SITE, NEWS SOURCE OR NEWSPAPER.