“Wall Street’s drive to lead investors into brokerage accounts charging set annual fees is shifting into high gear,” writes Jeff Opdyke in today’s Wall Street Journal.

“In the latest example, UBS PaineWebber is trimming the commissions it pays its brokers and charging them a fee for executing certain trades for clients. PaineWebber says it wants brokers to move more clients into so-called fee-only accounts, a longstanding goal of most major Wall Street firms.”

“In a typical fee-based account, investors pay a fee of roughly 1% of the assets under management, assessed quarterly, whether they trade in the account during the year or not. In a more traditional transaction-based account, customers pay per trade. With the market in turmoil the past two years, and trading volumes down, fee-only accounts are seen as a way to generate a more stable stream of income. For example, Merrill Lynch & Co., the nation’s largest brokerage firm, recently sweetened broker commissions for fee-based transactions and reduced or eliminated commissions for certain small transaction-based trades.”

“UBS PaineWebber’s plan has riled some of the firm’s 9,000 brokers, who argue that not all customers belong in fee-only accounts. Under the plan, which the firm unveiled as part of a larger compensation overhaul in the fall and began implementing Jan. 1, the nation’s fourth-largest brokerage firm now assesses a $12 ticket charge on brokers who execute a trade in a transaction-based account. And it has slightly reduced the commissions it pays to brokers.”

“By contrast, if a trade now occurs in a fee-only account, not only does the broker escape the ticket charge, he receives a four-percentage-point bonus on the commission schedule. Mark Sutton, president of UBS PaineWebber’s brokerage group, says the setup is designed to ‘incentivize the right behavior’ — moving clients into fee-only accounts, which he says matches ‘the strategic direction of the firm.’ He says the policy means brokers are motivated to grow their customers’ accounts, not just generate trades.”

“While $12 might not seem like much of a charge on a trade involving thousands of dollars, for a broker it can amount to a big pay cut. Consider that the average trade at UBS PaineWebber generates a commission of about $200. A top-selling broker would receive $78 as his commission; thus, a $12 charge amounts to a 15% pay cut. A broker at the bottom of the commission scale would receive $48 in commissions; here the $12 charge amounts to a 25% pay cut.”

“Fee-based accounts have been supported by investor advocates for years. One of the big complaints about transaction-based accounts is that brokers could be inclined to ‘churn’ the account just to generate commissions. In fee-only accounts, the interests of the broker and the client are more aligned.”

“In a recent interview, Arthur Levitt, former chairman of the Securities and Exchange Commission, says he has long favored fee-based pricing ‘because it eliminates any perception of conflict-of-interest that exists when compensation is based solely on commissions.’ ”

“But fee-only accounts aren’t for every investor. And UBS PaineWebber brokers are squawking because they feel the new plan spurs them, through the use of a financial penalty, to push certain clients into accounts that aren’t right for them.”

“A West Coast-based PaineWebber broker, who declined to give his name, says he refuses to move clients into fee-only accounts ‘because it would just cost them more” because they don’t trade much. “But now it’s going to cost me to do the right thing by them,’ he says.”

“Mr. Sutton says he ‘never wants a broker to do anything that’s not right for the client.’ He concedes that for brokers who focus on transactional business, the ticket charge, which is meant to cover the firm’s cost of executing a trade, could amount to a pay cut. He says a review of UBS PaineWebber customers who have switched so far shows that they have actually saved money in fee-only accounts. Before the switch, he says, they typically were paying about 1.14% of assets in commission charges in the prior 12 months; now they are paying slightly less than 1%.”