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Portfolio > Portfolio Construction

A.G.Edwards Furthers Asset-Allocation Push

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Hoping to continue recent strong growth in its asset-management and service-fee revenues, A. G. Edwards is rolling out seven new portfolios that mix mutual funds and ETFs, created by Ibbotson Associates Advisors. These new offerings give the brokerage firm 34 ETF-related portfolios in its Allocation Advisors program. More portfolio options should be rolled out by year-end.

“This gives clients a lot of investment choices based on their own investment objectives,” says Mike Scafati, senior vice president and manager of managed products. “For brokers, it gives them another tool to meet client needs and another arrow in the quiver of the consulting process.”

Investors can choose conservative, moderate or growth portfolios, including two portfolios that focus on tax-free income. Ibbotson, a unit of Morningstar, uses ETFs for their cost effectiveness; it relies on mutual funds in asset classes such as small-cap and international equity, where more opportunity may exist to add risk-adjusted alpha, Scafati says.

A.G. Edwards was early to the ETF game and launched its ETF model portfolio approach in 2001. The brokerage’s latest portfolio options require a minimum investment of $50,000 and have annual fees that start at 1.5 percent (1.25 percent in ERISA accounts).

In the quarter ended May 31, revenues rose 17 percent over the same year-ago period to $765 million, earnings jumped 50 percent to $78 million, and pre-tax profit margins grew 16 percent. Asset-management and service-fee revenues continue to be the largest source of revenue, 40 percent or $307 million; client assets in fee-based accounts expanded 23 percent, and total client assets ticked up 9 percent (see charts).

On August 7, NYSE Regulation fined the broker-dealer $900,000 “for improperly maintaining customers in non-managed fee-based accounts and charging customers excessive fees, in light of the trading activity in these accounts.” The NYSE unit is also requiring the firm to review and make restitution for such accounts enrolled between 2001 and 2004; plus, it reprimanded the firm for its failure to supervise “an errant producing branch office manager” and to “properly report to the NYSE statistical data on customer complaints.”

“We should note that these issues were addressed several years ago,” an A.G Edwards spokesperson says. “As the NYSE press release noted, the customer data issue was addressed in 2002. We also modified our policies concerning Client Choice in late 2003, and the activity in these accounts is now reviewed on a quarterly basis.”

The NYSE move follows similar action taken last year by NASD, which fined and demanded restitution from Morgan Stanley and Raymond James Financial Services.

Some experts see this as an unfortunate, but natural outcome of the industry’s recent emphasis on fee-based accounts. After rushing into this business, individual firms now must put better processes in place, so clients are enrolled in fee-based accounts only if it makes sense, shares Chip Roame of Tiburon Strategic Advisors. “Lots of firms are in the same spot” as A.G. Edwards, he says.


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