One of the most important trends in personal financial services is one- stop shopping.
A manifestation of this trend is the desire of financial services organizations to offer customers "combined statements" - a single monthly record of activity on all their accounts.
The Merrill Lynch cash management account, which combines both check writing and brokerage activity, has been providing customers with this convenience for many years. But as more and more bank-owned brokerage affiliates and mutual funds petition for this privilege, the regulators have become concerned.
For a customer with a brokerage and banking relationship at the same financial institution, it's easy to see why receiving a combined statement would be desirable. The customer would gain easy access to most of the information required to compute liquid net worth: stocks, bonds, mutual funds, annuities, money market instruments, and checking and savings accounts.
From the financial services company's perspective, the combined statement is simply one more example of technology affording an opportunity to compete and obtain real cost savings.
But the New York Stock Exchange, which has regulatory authority over many of the brokerage firms that clear securities transactions for financial service providers, views the issue of combined statements as a complex regulatory issue.
To the exchange, the presentation of financial information showing brokerage and demand deposit activity or brokerage, insurance, and mutual fund activity is a regulatory challenge requiring uniformity with respect to style and depth of information.
The Big Board's concerns can be summarized as follows:
Liability. When a member firm combines brokerage account activity with nonbrokerage information coming from other sources, it could incur additional liability if an error occurred in the statement production process or if the completed combined statement contains incorrect brokerage account data.
Mailing and production process. A member firm selecting a third party - usually a bank affiliated with the introducing broker - to deliver the brokerage account information for production and mailing is viewed by the exchange as having abdicated its responsibilities under applicable rules for preparing and sending customer statements.
Further, processes would have to be in place which would assure that the combined statement was actually produced and mailed, since the procedure was out of the hands of the member firm.
Customer confusion. The stock exchange is concerned that combined statements might generate significant customer confusion as to which entity - the bank, affiliated broker-dealer, or clearing firm - is responsible for the accuracy of brokerage account information.
Across the entire realm of issues facing the financial services industry, combined statements might appear as a mere border skirmish. Nonetheless, it represents an important competitive advantage that financial services companies other than broker-dealers understandably wish to preserve.
Accordingly, BHC Securities Inc., along with the other members of the Securities Industry Association's clearing firms subcommittee on combined statements, has worked closely with the New York Stock Exchange over the past several months to develop guidelines for member firms to follow when creating combined statements.
As a result of this cooperative effort, the exchange recently issued draft guidelines to the members of the subcommittee. The final version of the guidelines may come in the form of an interpretive memo or a rule change.
Regardless of the form, the good news is that the draft guidelines may now be used by member firms - with the understanding that they are subject to change.
Some of the guidelines are worth noting. For instance, any summary aggregating brokerage and nonbrokerage activity must indicate that the summary is provided as a service and includes assets at different entities.
In addition, it must identify all of the entities involved in the combined statement with their phone numbers, functions, and relationships to one another.
The summary must also disclose the different types of assets held, and state whether they are afforded Securities Investor Protection Corp. coverage.
Finally, the summary must clearly distinguish between brokerage and nonbrokerage assets and show the customer account at each institution.
The guidelines also suggest that the combined statement clearly separate the brokerage statement from the nonbrokerage statement, identify the parties servicing the brokerage account, disclose where assets are held, and what, if any, SIPC coverage exists.
It must also communicate that settlement proceeds are swept into a nonbrokerage account, and make clear distinctions between mutual funds offered, held, or serviced by member organizations or other parties.
The nonbrokerage statement (covering demand deposit, money market, or perhaps insurance and/or mutual fund activity) must, like the brokerage statement, be distinct. It must also identify the parties reporting assets, and their function.
Finally, the new guidelines suggest that where a third-party agent is used by the member firm to prepare and mail the statements, the member firm acting as a clearing agent must advise the stock exchange in writing that certain regulatory safeguards are in place.
These items include notification that a third party is acting as an agent; that the clearing agent has written procedures for reviewing the accuracy of third-party statements and retains a copy of all statements mailed by the agency; and perhaps most importantly, that the clearing agent retains responsibility for the accuracy of its statements.
A mouthful, yes, but clearly manageable. And good news for bank- affiliated broker-dealers, too. At the holding company level, there are clear cost savings, notably in postage, to be gained by combining statements. There are also soft-dollar savings derived through streamlining of the set-up procedures required to fulfill the statement-creation obligation.
Customers are also better served. Combined statements offer convenience and save time. The fact is, when assets are scattered across a patchwork of financial institutions, they are more difficult to manage and there is opportunity for error. In the end, the customer is poorly served.
When the customer suffers, so does his financial services provider. After all, customers will take their assets to the institution which serves them best. With the inroads that banking companies have made into other realms of financial services, they can indeed service consumers well. And there are several "macros" which suggest that there are many consumers to be serviced.
A baby-boom generation nearing retirement, the rise of 401(k) plans, the slimming of corporate pension benefits, and the possible demise of Social Security, are all placing responsibility for financial security on the shoulders of the consumer.
And, in unison, consumers are demanding more personal financial services. An important step in satisfying this demand has been successfully taken with the effort by the Securities Industry Association subcommittee and the New York Stock Exchange to provide workable guidelines and keep regulation in step with current technology.
The next challenge in this area will be to deliver statements electronically - resulting in even greater cost savings and more efficient delivery methods, and further reinforcing the concept of one-stop shopping.
Mr. Kaplan is secretary of BHC Financial and secretary, vice president, and counsel of its principal subsidiary, the securities clearing firm BHC Securities Inc.
