Flat-Fee Broker Accounts Can Have Costly Clauses.

I have a sad story about one family's brokerage accounts gone wrong. You should hear it for two reasons.

First, to be reminded to watch your money, even when it's being invested by someone you trust. Second, to learn about a potential risk, when your broker charges fees instead of sales commissions.

Flat-fee brokerage accounts are the coming thing. They're supposed to eliminate your concerns about conflict of interest. The broker supposedly has no incentive to churn your account. He or she gets paid the same amount, whether you trade or not.

But this protection isn't necessarily perfect.

The investor whose story I have to tell doesn't want to be identified, so call her Sue. She's a homemaker, divorced, in her 50s, with two children, 12 and 15. The children each have two trusts from their grandparents, with Sue as trustee. She also has her own account.

Six years ago, disappointed with the returns she was getting from a bank trust department, she transferred the money to the Sarasota, Fla., office of the brokerage firm Raymond James & Associates, or RJA. She had met her new broker socially, and served with hint on a nonprofit board of directors.

Soon thereafter, Sue signed up for RJA's Passport Account, which charges fees. She expected to pay around 1 percent of her assets. Her objectives were growth with income and medium risk. Beyond that, she left it to her broker to do right.

Today, she is wiser but, alas, not richer. She has filed an arbitration claim against RJA, saying her broker found a hidden way of earning extra money on her account. He earned it at her expense, she says. Her accounts failed to turn a profit of any consequence between 1994 and early April 1999 -- years when the general stock market boomed.

RJA's director of marketing, Larry Silver, had no comment on the case, except to call it "without merit." In its formal answer to her claim, RJA said that all the investment decisions in the account were "consensual and informed," that Sue "approved the type of transactions... received timely reports" and "assumed the risk."

So what happened here? Sue's attorney, Drew Clayton of Sarasota, calls it "bait and switch."

The brochure for RJA' s Passport Account promises "no traditional commissions -- just an annual asset-based advisory fee and low transaction charges." No exceptions are mentioned.

Her fine-print account agreement, however, said something else. It created a special category of investments, called "fee exempt." They included new and secondary public issues. If the broker bought Sue these "exempt" investments, he could earn a commission.

This broker apparently traded heavily in exempt securities. That's according to a preliminary analysis of Sue's accounts, done for the arbitration by Thomas Benson of the Diogenes Group in Naples, Fla.

Benson estimates that the broker earned a sum worth 2.3 percent to 4.5 percent of Sue's family assets under management.

Sue says she expected impartial advice, and had no idea what "fee exempt" implied. Raymond James says the term was explained in "plain English" in the account agreement, and as the trustee for her children, she had a duty to understand. RJA charges no advisory fee on exempt securities, during the first year they're in the account.

Among the new issues in Sue's family accounts was a company called CHS Electronics. It was brought to market by Raymond James in 1997, and the broker loaded her up with shares.

Initially, the stock accounted for 25 percent of her personal account, 39 percent in one of her daughter's accounts and 44 percent in one of her son's accounts, according to her claim. They still held substantial amounts of the stock in March 1999, when CHS announced that it had overstated its financial results and the stock plunged.

Raymond James says the drop in the stock price wasn't its fault, and that Sue "will presumably recover" money, through class-action lawsuits filed against CHS. But that would be pennies on the dollar.

Cerulli Associates of Boston, a research and consulting firm, estimates that $45 billion is being managed by stockbrokers on a fee basis. Cerulli's managing director, Andrew Guillette, thinks Sue's story is more the exception than the rule.

Still, anyone who has this kind of account should check the client agreement, to see if the broker has a way of earning commissions. If the broker buys a lot of commissionable stocks, it's a warning sign.

Correction: In a recent column about insurers going public and giving policyholders a choice between cash and shares, I wrote that Sun Life gives cash to people who don't choose. In fact, they give shares.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.