Home Private Equity Ex-Merrill Broker Turned Whistle-Blower Skewers Wirehouses On PE Fund Fees

Ex-Merrill Broker Turned Whistle-Blower Skewers Wirehouses On PE Fund Fees


A whistle-blowing former Merrill Lynch broker is claiming that the way wirehouses charge fees on private equity investments is in conflict with regulations and overbills clients.

The broker, Kurt Stein, is accusing dually registered brokerage firms of violating Regulation Best Interest and says he has presented his findings to the Securities and Exchange Commission in a meeting with the agency’s private fund investigators.

Stein’s allegations center around the firms’ different fee structures for clients on the brokerage side as compared to the advisory side. He also contends the way those fees are often charged can cause clients to overpay. On the brokerage side, for example, clients may be charged management fees on the total amount of capital committed from day one, even if the capital isn’t called for years. On the advisory side, however, clients are charged only when capital actually is called for specific private equity investments, he says. This difference can add up to hundreds of millions of dollars over the four- to six-year investment period of a fund, he estimates.

“It’s the same old story. Wall Street is sticking it to people,” said Stein, who worked at Merrill Lynch from July 2001 to March 2018, first as a broker and then as a dually registered investment advisor, according to BrokerCheck.

“Reg BI is supposed to stop that kind of perverse client abuse. The rule is very clear. Any investment professional has to recommend the account type, either brokerage or advisory, which is in the client’s best interest. Cost matters,” he said. “I submitted this to the SEC, and they contacted me and are investigating.” 

A Financial Advisor email to Jennifer Duggins, co-director of the SEC’s private equity funds unit, and Brian Caravello, a supervisory attorney advisor in the unit, requesting confirmation of the meeting was responded to by an agency spokesperson who stated, “The SEC does not comment on the existence or nonexistence of a possible investigation.”

Requests for comment by Merrill Lynch, Morgan Stanley and UBS, all of which manage private equity fund feeder funds for brokerage and advisory clients, were either declined or unacknowledged.

Stein said he first started looking at the issue about 18 months ago when a friend asked him to look over an account statement and explain how the charges were arrived at. He couldn’t. Stein’s examination of fee structures ultimately led to two stories about retail private equity fund returns, one of which appeared in Forbes, and the other in the New York Times.

Using his friend’s Merrill Lynch account as an example, Stein pointed to two Merrill Lynch feeder funds for two blue-chip private equity funds, both launched after Reg BI came into effect. The investor had committed $110,608 in one and $150,000 in the other, and by the end of May 2021, the one fund had invested $17,697 and the other invested $8,250 of those commitments. He was charged a 1% annual fee on the full commitments, which combined were $2,606.

But, he said, had the investor been directed to the advisory side, as required by Reg BI, the investor would have paid a 1% advisory account charge on actual assets invested with no upfront fee, according to the PPM, which would have been $259.

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