Brokerage industry watchdog group's survey is consumer eye-opener


March 25, 1996|By Bill Atkinson

BEFORE THEY put another nickel into the stock market, investors might want to bow their heads and say a quiet thanks to Drexel Burnham Lambert Inc., the notorious brokerage firm made famous by junk bond king Michael Milken.

Shortly before its demise, the New York-based Drexel agreed as part of a punishment meted out by state regulators to donate $1 million to form a consumer watchdog group to keep an eye on the brokerage industry.

Sixteen months ago, the National Council of Individual Investors was born, and Drexel's money appears to have been put to good use.

The National Council this month unveiled a survey that shows how brokerage firms even deep-discount brokers make money by clipping investors with a laundry list of fees and commissions.

The survey shows that customers can get tagged with trading commissions that are as high as $177 a trade, annual fees of $50 for not making enough trades, and even fees for postage and handling.

That's just for starters.

After looking at brokerage firms' range of services, commissions and fees, investment analysis performance and disciplinary history, the council ranked them on a 100-point scale in which firms that charged clients more received fewer points. A. G. Edwards Inc. and Merrill Lynch & Co. took top honors with scores of 74 and 73 respectively, and Prudential Securities Inc. finished last with just 24 points.

Gerri Detweiler, policy director with the Washington-based group, which has about 800 members, said the National Council's goal was to give investors a tool they could use to save themselves money when shopping for a broker.

"A lot of people don't even know what questions to ask when they are shopping around for a firm," she said. "They need to ask about the various commissions and fees."

The National Council spent four months collecting data on scores of brokerage firms operating in the United States. It used public documents and employed "mystery shoppers" to call on more than 75 brokerage firms.

After the data was collected, the group took the 10 largest full-service, bank-affiliated and discount brokerage firms, and compared them to one another.

Baltimore's Alex. Brown Inc. and Legg Mason Wood Walker Inc. were not among the 10 largest full-service brokerage firms listed in the survey.

Of the full-service firms, which provide customers with a wide range of services and investment products including research and advice, PaineWebber was king of commissions. It charges $177 for what the National Council considers an average trade 500 shares for $10 each while Everen Securities Inc. charges a commission of $130, which ranked as the lowest in the group.

Deep-discount brokerage firms were much cheaper, according to the survey, but customers sacrifice the frills. Wall Street Equities charges a commission of $24 for 500 trades at $10 a share, and Pacific Brokerage Services Inc. charges $25.

The biggest surprise was among brokerage units affiliated with banks. The commissions they charged were cheaper than some of the large, well-known discount brokerage firms.

First Union Brokerage Services Inc., which received the National Council's highest score among bank brokerage firms, charges $76.50 for trades of 500 shares at $10, while Charles Schwab Corp., the well-known discounter, charges $89.

"The bank-affiliated firms were much more competitive than we expected," Ms. Detweiler said. "It may be because they are sort of the new kid on the block. They may be conscientiously trying to price themselves lower."

All of the brokerage firms surveyed charged some type of fee. Wall Street Equities, Investors National Corp., and OLDE Discount Stockbrokers charge customers a $25 registration and delivery fee, while Merrill Lynch, Wachovia Corp. and several others charge $15 for the same service.

PaineWebber and Prudential nick customers with postage and handling fees of $4.50, while the deep-discount brokerage firms Pacific Brokerage and Wall Street Discount Corp. charge $4.00 and $3.50, respectively.

"The fees were very random and clearly point out that investors don't just want to ask about commissions, they want to ask about fees also," Ms. Detweiler said.

Ms. Detweiler said brokerage companies are willing to negotiate commissions and fees with customers.

"Individuals can have a big impact on the market if they start demanding the kind of pricing or treatment they want to receive," she said. "It is partly a matter of saving yourself a few dollars, and it makes the market more competitive."

Pub Date: 3/25/96

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