How Fees Are Re­mak­ing the In­dus­try

IBDS and re­gional firms have made the big­gest changes; RIAS have room for growth.

Financial Planning - - CONTENTS - BY TO­BIAS SALINGER

IBDS and re­gional firms have made the big­gest changes; RIAS have room for growth.

A re­port by Aite Group pre­dicts that at least half of all client as­sets will be in fee-based pro­grams by 2025.

It seems a dra­matic mile­stone at first glance: client as­sets have reached a record high of $20 tril­lion. But this stun­ning num­ber ob­scures a far more sig­nif­i­cant shift 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 this trend will ac­cel­er­ate, so that at least half of all client as­sets will be in fee-based pro­grams by the year 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 $440mil­lion, 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.”

On­go­ing Shift

In­de­pen­dent and re­gional bro­kerdeal­ers are chang­ing the most in the shift to fee-based plan­ning, with ma­jor firms like Ad­vi­sor Group cut­ting their com­mis­sions and tak­ing on some 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 the pres­ence of 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 fee­based 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 self­di­rected 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 the 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 longterm 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 at 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

The fidu­ciary rule has al­ready height­ened scru­tiny on com­mis­sion-based prod­ucts in re­tire­ment ac­counts, which has driven the shift to more fee-based ac­counts in­dus­try­wide, 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 that 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 guar­an­teed­in­come prod­ucts, she says, not­ing many of its mu­tual fund shares are also con­vert­ing to lower-cost classes. A mem­ber of the Fi­nan­cial Ser­vices In­sti­tute’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’d still like to of­fer com­mis­sion­based 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, she says. “I do a plan for ev­ery client,” 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 fee­based 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.

Us­ing fees helps firms “smooth their rev­enue stream and make it more pre­dictable,” says Bill But­ter­field of Aite Group.

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 at a job is im­pos­si­ble, ac­cord­ing to 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

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 the 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.”

Kim Kropp, a founder of Moy­lan Kropp in Omaha, Ne­braska, pre­dicts a grow­ing ap­petite among clients for holis­tic plan­ning, rather than robo ad­vice.

Jamie Price, CEO of Ad­vi­sor Group, sees longevity plan­ning as a ne­glected part of risk man­age­ment.

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