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Race to zero? These wealth managers aren’t sweating it

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Anxiety about zero commissions? Not at the IBDs.

That at least is the message delivered by top executives at self-clearing independent broker-dealers. Yet despite the nonchalance, the fee wars among asset managers are having small, but notable impacts — and prompting renewed focus on core business.

“All these actions always remind us there will be price pressure in our business,” Raymond James’ CEO Paul Reilly said on an earnings call in October, going on to highlight how the firm will help advisors add value to client relationships and invest in cost efficiency.

The commission-free shake-up began in earnest in October when Schwab said it would drop these trading costs, prompting other retail brokerages, including Fidelity, E-Trade and Wells Fargo, to do the same.

Analysts have subsequently quizzed chief executives at IBDs about potential impacts on their businesses during earnings calls. Just how are you going to respond to these discount brokerages, they asked.

“That has a really small impact on our business,” LPL Financial CEO Dan Arnold told analysts during his company’s third quarter earnings call.

To be sure, LPL's chief executive has a point. Trading commissions are not a revenue driver at independent broker-dealers. Still, broader fee compression, such as that of asset management fees or arrangements with third parties, are altering pricing models across the industry.

Firms are turning away from their reliance on revenues from partnership arrangements and instead focusing on generating more revenue from the services they provide, says Dennis Gallant, a senior analyst at research firm Aite Group’s wealth management division.

LPL launched no-transaction-fee ETFs across its advisory platforms in December. The network features funds from State Street Global Advisors, Invesco and WisdomTree, according to LPL. It resembles platforms at discount brokerages that had been built out for years before commissions disappeared in October.

Raymond James, meanwhile, dropped commissions within its independent advisory division, which services about 200 standalone RIAs with no broker-dealer affiliations. CEO Paul Reilly said at the end of October that the revenue impact to the firm would be $7 million to $8 million per year.

Of course, even with these changes, self-clearing IBDs still charge fees related to transactions from some of their clients. These charges aren’t easy to compare.

“The problem with looking at the fees is that every firm has a different way of how they construct their fee and payout structure,” Gallant says. “It's like comparing mobile phone plans — you'll never figure this one out.”

LPL, for example, charges a $5 transaction fee/service charge per transaction on advisory accounts (for trades of ETFs not it the NTF network), according to disclosures. Commissions on RIA accounts are $9 for equities and ETFs and $25 on options.

At Raymond James, some clients pay a $5.95 handling/processing fee per transaction, according to pricing disclosures. The company declined to comment on how many clients are subject to these fees, but disclosures point out that “certain transactions and account types, such as managed accounts, may be exempt from this fee.”

Apart from trading commissions or transaction fees, LPL, Raymond James and Ameriprise charge clients an array of other fees ranging from conversion, research and custody, which are detailed in lengthy lists.

While these fees may add up, clients typically wouldn’t use an IBD simply to trade ETFs in a brokerage account.

“[Stock trading and transactions are] not why clients come to us. It's not what we ask our advisors to do,” Ameriprise CEO Jim Cracchiolo said during the firm’s October earnings call.

Schwab and TD Ameritrade estimated in October their revenue cuts to add up to $100 million and $240 million each quarter, respectively. LPL, by contrast, made a little over $215 million in “point-in-time” fees over all of last year, according to earnings statements, a figure that includes transaction, IRA termination and conference service fees.

Erik Bass, an analyst who covers Ameriprise at the independent research firm Autonomous Research, says that trading commissions are not a driver of revenue at the brokerage. “They don't specifically disclose what the revenue is from stock trading, but it is minimal,” he says.

No IBD will be sweating the impact to their bottom lines, according to Gallant.

“Certainly this is a revenue stream that did feed the margins for some firms, but it was a minimal one, and one that was anticipated to go down,” he says.

When asked about the impact of retail brokerages offering zero commissions, spokeswomen at Ameriprise and Raymond James declined to comment beyond pointing to statements or data presented by executives on earnings calls. LPL didn’t respond to requests for comment.

“Firms are looking to how they can scale, pursue more affluent clients and gain more wallet share, through initiatives like technology or seeking out better client engagement,” Gallant says.

EVOLVING PRICING MODELS
Broker-dealers have reduced revenue from product-based commissions, including 12b-1 fees attached to certain mutual fund share classes, that historically served as a multi-million dollar revenue booster.

Ameriprise experienced a $30-million decrease in distribution fees in 2018 after completing its transition to share classes without 12b-1 fees in advisory accounts during the first quarter of 2017, according to the firm’s annual report.

Bass, the Autonomous Research analyst, says that Ameriprise invested in technology, such as its client-facing web portals and CRM tools, and that it was working to drive more assets into its wrap accounts.

“That’s where they’ve been in flow consistently, and where most of the assets are going to,” he says.

No matter how far fees fall, companies offering high-level financial advice will be resilient, Bass says.

“Companies that offer a broader array of services and are really driven off of an advice component have been pretty resilient so far and will probably be able to defend their fees more than people who are offering a commodity service, like stock trading or custody of asset management products,” he says.

Ameriprise’s Cracchiolo said he isn’t worried.

Even if fees adjust, “we feel like the services we provide can really counteract that,” Cracchiolo said.

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