The Wall Street Journal-20080204-Investing in Funds- A Monthly Analysis- Adviser Alert

Return to: The_Wall_Street_Journal-20080204

Investing in Funds: A Monthly Analysis; Adviser Alert

Full Text (713  words)

[The Latest News from the World of Investment Planning]

Who Got the iPhone?

Wall Street rules require financial firms to monitor and archive their electronic communications, but new smart phones -- such as iPhones, BlackBerrys and Treos -- are making that difficult.

That's because the technology is constantly changing, and the devices give financial advisers easy access to text messaging, which securities firms generally ban because it is a challenge to track.

Firms need to know what new gadgets their reps are using, regulators say. In recently released guidance, the Financial Industry Regulatory Authority said it expects members to prohibit employees from using their own electronic devices unless the firm can monitor and archive such communications. If firms don't prohibit personal devices, the regulator advises them to consider requiring preapproval for business- related use of such equipment.

Because text messages are generally sent through cellular towers -- and don't go through a central server -- it is difficult for brokerage firms to monitor and archive those messages, which is why many have banned text messaging altogether.

To keep up with changing technology, firms are taking different tacks: Some give employees a choice of what new gadgets they can use, while others require standardized devices.

"It's very hard to tell people not to use the latest technology," says Hardy Callcott, a lawyer in the broker-dealer practice group at Bingham McCutchen in San Francisco. "For people coming out of college or business school now, it's just the way they communicate."

Bright Spots in a Dark Year

The wealth-management businesses of Merrill Lynch & Co. and Citigroup Inc. thrived in 2007, even as the parent companies stumbled badly.

Merrill's Global Wealth Management unit last month reported record fourth-quarter revenue of $3.6 billion, up 12% from the year-earlier period. The unit's full-year revenue rose 18% to $14 billion. Overall, Merrill posted a fourth-quarter net loss of $9.83 billion, mostly due to its exposure to the U.S. subprime-mortgage market and complex debt instruments.

Citigroup posted a quarterly net loss of the same size, $9.83 billion. But its wealth-management business -- Smith Barney, Citi Private Bank and Citi Investment Research -- had a record fourth quarter, with revenue jumping 27% to more than $3.4 billion. For all of 2007, the unit posted $10.5 billion in revenue, up 29% from 2006.

So far, wealth-management clients at the two firms largely have avoided direct losses from the collapse of securities backed by subprime mortgages. In 2007, their accounts generally benefited from then-rising markets, which buoyed fees and commissions earned by brokerage firms.

At Citigroup, Chief Executive Vikram Pandit told Smith Barney brokers on a conference call that he wished the wealth-management unit "was bigger." While the company announced a plan to sell noncore assets, he said that the unit is one of Citigroup's "core growth businesses" and that there are other businesses that have "a lot more work to do" in the wake of the company's $18.1 billion in write-downs.

Should the current economic slowdown worsen and markets continue falling, results from wealth-management businesses would likely weaken as well. But the increasing emphasis on fee-based accounts, in which clients are charged a percentage of their assets, would provide a partial buffer in a protracted market downturn.

Rethinking SEC Rules

Staffers at the Securities and Exchange Commission are being urged to "think outside the box" on possible new ways to regulate stockbrokers and investment advisers, says Andrew Donohue, director of the SEC's investment-management division.

The creative thinking comes in the wake of a Rand Corp. report, commissioned by the SEC, that found many U.S. investors don't understand the difference between brokers, who are subject to one set of laws, and advisers, who are regulated by different laws. The study provided no policy recommendations but raised questions about continuing to regulate brokers and advisers differently when their businesses are becoming more similar. SEC Chairman Christopher Cox wants suggestions by May, Mr. Donohue says.

Under current rules, brokers are required to recommend investments that are suitable for their customers and obtain the best execution of their customers' trades. Advisers must act in their customers' best interest, a standard that advisers view as offering more protection for investors.

---

Contributions from Dow Jones Newswires' reporters Jaime Levy Pessin, Evelyn Juan, Kristen McNamara and Judith Burns.