It seems a dramatic milestone at first glance: client assets have reached a record high of $20 trillion. But this stunning number obscures the far more significant move from commissions to fee-based accounts, which is reshaping the advisory industry.
At the end of 2016, 39% of client assets were in fee-based programs, up from 30% in 2010, according to a report last June by Aite Group. The consulting firm predicts that trend will accelerate, so that at least half of all client assets will be in fee-based programs by 2025.
Financial advisor Kim Kropp has watched the industry’s shift firsthand since she and her business partner launched their RIA practice in the ‘90s. Her firm, Moylan Kropp, in Omaha, Nebraska, manages client assets of $440 million, with 60% already in fee-based accounts under Securities America’s corporate RIA, she says.
Her firm’s share of fee-based assets will rise to about 80% of its client assets in the next five years, she predicts, driven in part by demand for holistic planning rather than robo advice.
“Pretty soon people are going to understand that it’s better to have a human being in front of you than a robot,” Kropp says. “That’s where I want it to be. That’s the gratification of our profession.”
Independent and regional broker-dealers are changing the most during the ongoing shift to fee-based planning, with major firms like Advisor Group cutting their commissions and taking on new issues like planning for increasingly long life expectancies.
Wirehouses preceded them in pivoting to fee-based accounts, and even RIAs have room for more growth in that area. Then there’s the insurance industry, where commission-free products have barely made inroads yet.
Overall, the fiduciary rule and robo advisors have disrupted the wealth management space, but advisory accounts bring more reliable revenue than products. In addition, technology offers incumbent firms new avenues for business, says Bill Butterfield, the author of the Aite Group report.
“I do see a continued shift to fee-based as we move forward over the years," says Butterfield, a senior analyst for wealth management.
"For those who just want to buy and sell stocks, or just need the execution piece, that’s where the self-directed firms will play,” Butterfield continues. “Everything’s pointing in the fee-based direction.”
Fee-based accounts constitute 34% of the assets at self-clearing independent and regional BDs, compared with 38% at wirehouses, according to Aite Group. The regional and independent self-clearing firms, which include LPL Financial, Edward Jones and Ameriprise, crossed $1 trillion in fee-based assets in 2016.
Wirehouses’ greater resources gave them a head start, according to Butterfield, who estimates that fee-based assets at the largest independent and regional BDs will top 50% by 2027. Tech tools around services like long-term care, health savings accounts and complex estate planning can help speed up the move, he says.
Butterfield hasn’t yet seen any firm introduce such software on a large scale. With robo advisors suppressing fees for asset allocation and offering well-designed apps for clients, technology around other services would be a boon to incumbents, says Lex Sokolin, a partner with Autonomous Research.
“Brokers have to increasingly become advisors to their clients, whether around financial, health or life planning,” Sokolin adds. “Technology that enhances that human relationship for the advisors will win out in the long term.”
The lasting role of the fiduciary rule in that mix remains unclear, but many advisors and BDs have argued that it makes it harder for them to compete with robos for smaller clients.
The fiduciary rule has already heightened scrutiny on commission-based products in retirement accounts, which has driven the shift to more fee-based accounts industry-wide, according to Butterfield’s report. Many firms have already carried out significant changes, even as they retain some commission-based services. At the same time, the fiduciary rule has divided the industry into supporters and opponents, leaving IBDs arguing their commissions still have a place.
Kropp started focusing on fee-based services in the ‘90s, when she opened her RIA practice. The firm’s new business now falls almost entirely on the fee-based side, except for 529 plans and guaranteed-income products, she says, noting many of its mutual-fund shares are also converting to lower-cost classes.
A member of the FSI’s board of directors, Kropp says she believes that some of the rhetoric surrounding the fiduciary debate unfairly equates independent advisors with stockbrokers and that, if it’s ever fully implemented, the rule could limit an advisor’s options. Even though most of her firm’s business falls on the fee-only side, she says she would still like to offer commission-based products when she thinks they’re a better fit. For example, an annuity allowing for guaranteed income plus investment returns would work better for a pensioner than a savings account or a CD.
“I do a plan for every client. I look at every aspect of their financial picture. Nobody fits in a box,” Kropp says. “I look at every aspect of their financial picture. Nobody fits in a box. I don’t use a template for my plans.”
IBDs and regional firms have made similar arguments even as they adjust to changing times. In early February, Ladenburg Thalmann hired the asset management veteran John Blood for a newly created senior vice president position boosting the IBD network’s fee-based services and presence in the RIA space.
The same month, Raymond James launched a suite of longevity planning tools. The software integrations include services like estate planning, health care, wellness and protection from elder fraud. Some 40 advisors serving on the firm’s Retirement Solutions Advisory Board had proposed the idea.
At Advisor Group, the share of fee-based accounts increased to 37% by the end of 2017, up from 31% four years earlier, according to CEO Jamie Price. He serves as the chairman of the IBD network’s Longevity Council, which Price describes as working on helping its 5,000 advisors with holistic services.
Commission-based advice fits that description, he says, when it’s less expensive and solves the client’s need. The Longevity Council, which had its first meeting in January, consists of executives from 16 major insurance firms tasked with trying to address the financial problems posed by people living longer.
Living for decades solely on income received during 40 years on the job is impossible, says Price, who sees longevity planning as a neglected part of risk management. Advisor Group is endeavoring to help advisors grow their businesses with a holistic, more fee-based approach, while attacking the difficult longevity issue.
“I think our industry is the industry that has to solve for that," Price says. "We serve the very clients that have the possibility of outliving their money, and this is where I think the insurance industry can play a part. And it can’t be about the next whiz-bang product with a nice new bell and whistle on it.”
DPL Financial Partners helps RIAs find insurance without bells and whistles like commissions and high fees, CEO David Lau says. The firm, founded in 2014 by Lau, the former COO of Jefferson National, took more than two years to get to market simply because there weren’t enough such products.
Insurance carriers have started offering more fee-based or hybrid products, but they still constitute only about 1% of overall sales, according to Lau. His Louisville, Kentucky-based firm, which has about 50 clients, received a capital infusion from private equity firm Eldridge Industries in February.
The firm offers commission-free life insurance and annuities, and it’s working on health insurance products like long-term care, Medicare supplements and disability. Advisors at RIAs have been responsive to what Lau refers to as his personal crusade, he says.
“Insurance is one of the last bastions of commission-based, transaction-based business in the advisory world. You rarely see loaded mutual funds being sold. You don’t even have to say ‘no-load’ anymore, it’s assumed,” Lau says. “Insurance is the opposite. It’s almost exclusively commission-based.”
The bottom line will loom large in the next move for firms of any type, says Butterfield, the Aite Group analyst. And fee-based assets look good to firms when compared with the ups and downs of product sales.
“They’re able to smooth their revenue stream and make it more predictable, which is usually desirable for any type of business. It allows them to deepen that relationship with clients and insert themselves into one financial life," he adds, "more than just selling products.”