Yesterday we posted an item on the looming end of fee based brokerage accounts that involved some confusion about how brokerages use the term "wrap account." We've since corrected the item by simply deleting the term "wrap account," which our brokerage friends tell us is a specialized term that shouldn't be used to refer to just any fee based account.

Wrap Accounts, in the formal language of brokers, are accounts where clients pay for investment advice, and the firms and brokers selling the advice need to be registered investment advisers with the bonding and heightened duties that go with being an investment adviser, according to a broker we spoke to. The non-wrap, fee based accounts had the advantage of charging a fee structure similar to the wrap accounts but could be sold by brokers who were not also registered investment advisers.

"The 'Wrap Account' and 'Fee Based Account' distinction is a narrow one, and could be seen as a distinction without a difference," a ex-broker writes. "When I was a retail broker at Morgan Stanley we were constantly reminded that our asset based fee accounts were not wrap accounts, and that we were not charging our clients for the advice we were giving them. Fee based accounts, or asset based accounts, or asset based fee accounts—I remember all three names being used - were merely a different way of billing for transactions. MSDW (as it was called at that time) called them Choice and we were paid nicely on them."

Of course, this distinction seems to be more of a matter legal formalism than real practice.

More on it anyway, after the jump.

We’ve just begun the last week of fee-based brokerage-accounts.

This spring a federal court struck down the rule allowing the accounts, requiring brokerages to shut down the programs by October 1st. The accounts were a popular choice with some brokerage customers, particularly those who traded frequently. Where traditional brokerage accounts charge per-transaction fees, the flat fee accounts charged a flat fee—usually between 1% and 3% of assets—for an unlimited number of trades. For frequently traders, the accounts could create substantial savings.

Wall Street brokerages loved the accounts, and so did federal regulators. In fact, the accounts were first created under a rule proposed by the Securities and Exchange Commission in 1999. At the time the SEC was trying to find a way to discourage “churning”—the practice of brokers and financial advisers encouraging customers to make more frequent trades to generate fees. After brokerages started offering the accounts, churning complaints dropped 43%.

More on the growth and death of the flat fee accounts after the jump.