TRADING COSTS AT ALL-TIME LOW, BUT NOT FOR ADVISERS AND CLIENTS: WHEN IT COMES TO FEES, ‘DON’T ASK, DON’T TELL’

The price war in on-line retail stock trading has financial advisers giving their own trading costs a second look.

Some don’t like what they see.

That’s because financial advisers and their clients may be the only ones not benefiting from the price-cutting led by firms like Ameritrade and DLJ Direct, which advertise commissions as low as $8 for the first 1,000 shares of stock. Yet the typical financial adviser pays as much as 6 to 8 cents a share through Charles Schwab or Fidelity Investments’ clearing organizations, says an adviser.

“A lot of people, especially the customers, don’t know about these costs,” says one adviser who wants to remain nameless, fearing he would anger his broker-dealer. “The industry is very slow to change.”

But few advisers complain to the broker-dealers they clear trades through, largely because their clients don’t realize they’re missing out.

Besides, stock commissions are among many costs passed along to clients and some advisers are loath to draw attention to the whole issue of charges embedded in a client’s fee.

Ironically, financial advisers are often the first to grouse about hidden costs in mutual funds, but they’re hiding many costs of their own from clients. While some fee-based advisers charge for transactions above and beyond that fee, usually 1% or so of assets under management, others embed the cost in their annual fee without itemizing the charges.

The net effect: Clients aren’t aware they may be overpaying for trades.

To be sure, in some cases, broker-dealer firms are able to negotiate cheaper rates for certain advisers based on the volume of trades the advisers bring in. But for less active traders, retail do-it-yourself investors often fare better.

apples vs. oranges

While acknowledging the discrepancy, advisers note their clients demand more in the way of service than do-it-yourself investors, and that doesn’t come cheap.

“There are things an adviser can do to keep a lid on expenses,” says Anthony Ogorek, an
adviser in Buffalo, N.Y,. who supervises nearly $100 million in assets for his own firm.

Mr. Ogorek clears through Charles Schwab Corp., and says he doesn’t like having to pass on these charges to his clients. But he says Schwab offers him services that an individual investor won’t get on his own. To compensate for the added trading charges, Mr. Ogorek keeps the total cost of his services down by seeking out mutual funds that combine low expense ratios with no 12b-1 fees, which fund companies charge for distribution costs.

Broker-dealer officials and Schwab spokesmen say comparing their back-office services to those for do-it-yourselfers is like comparing apples to oranges.

Advisers add that Schwab allows them to do things that are logistical nightmares. Schwab-affiliated advisers like Mr. Ogorek are quick to note such extras. For instance, Schwab will accommodate advisers who want to trade a particular stock investment at once for multiple clients. And advisers can get traders on the telephone to explain a complicated transaction to them.

not your client

The average investor using Schwab’s on-line or telephone trading services can’t. And while Schwab acknowledges these services cost more, “we do everything we can to insure (advisers) get a break for the level of business they bring in,” says a Schwab spokesman. He also says the firm is working on lowering on-line trading costs to advisers.

The same is true of the Pershing division of Donaldson Lufkin & Jenrette of New York. Advisers whose broker-dealers clear through Pershing often pay more for trades than clients of the popular new DLJ Direct on-line trading service. Pershing did not return calls.

One of those broker-dealers is LPL Financial Services Inc. of Boston, which has 500 independent advisers. Pershing charges advisers who want to trade stocks in the LPL SAM wrap account program $20 plus 50 cents a share for the first 1,000 shares. But DLJ Direct, the parent’s on-line service, charges only $20. At least one adviser who clears th
rough LPL has complained to firm officials about the higher costs.

But LPL’s managing director of advisory services, Mark Lopez, says advisers shouldn’t worry they’re eventually going to lose their clients to the on-line brokerages. “That client is not your client,” Mr. Lopez tells his reps. “He wouldn’t take advice from you if you promised him a 20%-a-year return.”