Wrap accounts going bye bye

A recent WSJ article delves into how brokerages are trying to keep customers (free WSJ Digg link) now that wrap accounts are no longer legal. The background is that the courts said brokers couldn't act like investment advisers and get a fee for managing money. Will this be a bum deal for customers who liked to actively trade? Maybe.

Of course, the brokers don't want to give up these potentially lucrative customers, so now they are trying to convert the customers' wrap accounts into nondiscretionary advisory accounts, and are even lowering account minimums (which will potentially allow more of the mass affluent segment to have these accounts).

To help lure clients into its Strategic Advisor account, UBS this summer lowered the investment minimums to $50,000 from $100,000 in investable assets. Citigroup Inc.'s Smith Barney has a minimum investment for its Smith Barney Advisor program of $25,000, which it recently broadened to include household assets.

Most affected is Merrill Lynch, the largest player in fee-based brokerage accounts with about $100 billion in assets. The firm is pitching its nondiscretionary advisory account, known as Merrill Lynch Personal Advisor, as the main alternative to fee-based brokerage accounts, Merrill brokers say.

So what is the difference between the old wrap accounts (fee-based brokerage accounts) and the nondiscretionary advisory accounts? The nondiscretionary advisory accounts

can hold individual stocks and bonds, mutual funds, exchange-traded funds, and cash investments -- investors can get more comprehensive advice from a registered investment adviser, but still call the final shots since the adviser must get the client's permission before making changes.

Customers are also being converted into traditional commission based brokerage accounts. I personally feel that the commission based accounts are the way to go, with a good discount broker, like Schwab, TD Ameritrade or E*Trade.