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Check The Fine Print

06/03/05 02:35:59 PM PST
by Bruce R. Faber

Once upon a time, it was not unusual for a brokerage house to charge an annual fee of $20-40 a year to offset the cost incurred for maintaining your brokerage account. These days, if you jump through the right hoops, your account is free. If you don't, maintenance fees can get real expensive.

Back in the good old days of "irrational exuberance," the question was not if the Dow Jones Industrial Average (DJIA) would hit 100,000, but when. Back then, the equity markets were going wild, and the stock market was headed for the blue. In those crazy days, brokerage houses were trying every trick in the book to get you to invest your money through their firms. Those brokerages went through huge sums of money for advertising, and almost nothing seemed beyond the pale when it came to attracting your trading accounts to their house. From a barrage of radio, Internet, and television commercials to sponsoring lavish Super Bowl halftime shows, no expense was spared to get your money into their brokerage. During that same period, brokerage commissions and fees just kept coming down. Small accounts were welcomed because both the small account holders and the brokers knew that small accounts would soon turn into large ones.

Actually, it was only the small account holders who "knew" that. What many of the brokers knew was that much of the stock they were touting so highly was already well on their way to the scrap heap. What the brokers were preaching as gospel to the multitude of investors who were relying on their expertise was really just hype. The major brokerage houses ended up being fined $1.4 billion for misleading their clients. As large as that number seems, it is but a small percentage of the amount of money lost by investors on the brokerage houses' advice.

At the same time the brokerage firms were pushing these unstable companies, whose financial foundations were built on fertilizer's first and freshest manifestation, their brokers were emailing each other about how stupid the investors were for buying all that "crap." As one notably honest — but rare — television commercial portrayed, much of the brokerage house philosophy of the day was: "Okay, kids, here's today's magic stock. We've got big incentives on this one, so get on the phones — we've got a lot of stock to move: Don't mention the fundamentals, they stink. Now let's put some lipstick on this pig!"

As the overhyped markets unwound and $8 trillion worth of investor blood, sweat, tears, and life savings poured into the pockets of the pros and the coffers of the market makers and manipulators, the general public cut back sharply on its trading. It is important to note here that brokerage firms make their money on the commissions that the trades bring in, not on whether that trade makes or loses money for the client. Given the massive losses posted by most of the small, novice-to-the-market traders, there became a lot less money available to trade, which resulted in a lot fewer people trading. Low trading volumes are not good for brokerage house profits.

Less trading means less income and diminished numbers on the bottom lines of the brokerage houses. Not unexpectedly, some brokerages have changed their fee structures to bring those numbers up. Many small accounts don't have the money, nor the inclination, to actively trade, which means they are no longer the cash cows to the brokerage firms that they once were. Many of those who used to trade almost daily and rush to the mailbox to check the size of their growing portfolios and their newfound paper wealth no longer do so. They now pay little attention to their once much-anticipated statements. This lack of attention could be costly.

If you are a small investor and your losses have left your account with less than $20,000, this might be a good time to look in that drawer where you've been pitching your statement envelopes and check the fine print. See if those extra pages tucked in with your portfolio balance have the answers to the questions you should have. Look carefully to see if one of those "Change notices" has put your remaining assets into final jeopardy. There are some houses that still charge only $25 to $35 per year, but others now charge more. A lot more.

Case in point: Recently, an older friend of mine wondered why she had a $40 charge against one of her accounts. When I looked into the situation, I discovered that it was a quarterly account fee. Not yearly, not semiannual, but a quarterly account fee. Because of a recent drop in the value of the two portfolios she held through that brokerage house, to a total worth of less than $20,000, the firm was now taking $160 a year out of what was left in her shrunken account.

What's the old saying? "When it rains, it pours"? The lady had been forced into retirement because her job was outsourced, then Mr. Market took a big chunk of her saving investments, and now, the brokerage house was after what was left, and they got most of it.

Writing in her behalf, I queried the brokerage house about the situation and received a nice reply that was mostly boilerplate. The information it contained had actually had been sent to her along with her statements; in addition, almost all of the information was available online. The response was rather lengthy, but the pertinent parts of the letter were:

Thank you for your email concerning the activity on the account... I apologize for any inconvenience our quarterly maintenance fee has caused you. I hope the following information clears things up... Each account that is open at XXXXXXX does cost XXXXXXX money in overhead... This fee helps to offset the overhead that the account incurs while here, if the account holder is not generating income in other ways! [As described below.]

...XXXXXXX may modify the fee structure anytime by posting a modified schedule on its Web site.

...The account service fee will be waived if one or more of the following criteria are met on our "review" date:

(Ten boilerplate rules for waived account fees followed.)

...On a side note, I see that there is currently a negative balance due to service fees on this account... Please bring the account balance into the positive by either selling securities or bringing in money. This is a timely matter, as our Margins Department may start to sell off securities in order to bring the account balance up... Please let us know if you have further questions or concerns. Thank you.

Is that a polite reply or what? Yet no matter how nice the reply may be, I repeat my earlier suggestion. Go give your brokerage house statements a good looking-over. Your losses could be even greater than you thought they were. It might be worth your effort to close some of your small accounts or, if you are lucky enough to have several small accounts, read the fine print for all of the houses and combine your accounts at the one brokerage that offers you the best total value for your money.

You may want to go online and check out other brokerage houses to see if there is one that remains friendlier to accounts the size of what you have left. In the case I've mentioned, the one stock left in the account was sold for around $220. After all the fees were paid and the account was closed, the final check that my friend received was just $85. Needless to say, the larger account at that house was quickly moved to another brokerage, as were the accounts of several others who, years ago, had moved their portfolios to that brokerage on my recommendation. With any luck, we were able to lower their overhead costs considerably.

As we so often hear, your private accounts really are your money. It doesn't take an act of Congress for you to put your money where it is serving you best and costing you least. You've no need to feed the brokerage firm's greed. If they want to sponsor slick productions and put makeup on the porcine, they can do so, but there is no reason that you should have to pay for the smoke and mirrors, or for Miss Piggy's cosmetics.

Bruce R. Faber is a Staff Writer for Working Money.


Current and past articles from Working Money, The Investors' Magazine, can be found at

Bruce R. Faber

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Seattle, WA 98116
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