Cogent: Two-thirds of industry compensation to be fee-based by 2015

Wirehouses and regionals pick up trend; mutual funds feeling pressure

Jul 23, 2013 @ 1:10 pm

By Jason Kephart

The glacial shift toward fee-based compensation is expected to accelerate over the next two years, according to Cogent Research LLC.

It is a bad omen for the mutual fund industry, which already is under pressure.

"I'm not surprised given it's widely more profitable than transaction-based business models," said James Osborne, founder of Bason Asset Management. "It's much more sustainable for the adviser."

Two-thirds of industrywide compensation is expected to come from asset-based fees, up from 59% today and 55% in 2007, according to the 2013 Cogent Advisor Brandscape.

The study surveyed 1,700 financial advisers across all channels during the first quarter. The respondents had an average of just over $100 million in assets under management.

The leap forward is thanks to wirehouses and regional broker-dealers moving away from commission-based models. Asset-based fees are expected to make up 70% of wirehouse advisers' compensation in 2015, up from 58% last year, and 57% of regional advisers' compensation, up from 42% in 2012.

Registered investment advisers remain the most devoted to the asset-based model with 84% of compensation derived from it, up slightly from 78% in 2007.

The biggest loser in the industrywide shift toward asset-based compensation could be actively managed mutual funds.

“Advisers are increasingly reliant on fee-based compensation, which is affecting their general business approach, as well as product selection,” Meredith Lloyd Rice, senior director of syndicated research at Cogent, said during a webinar announcing the study's findings. “In fact, advisers are more focused than ever on lowering costs this year.”

Ms. Lloyd Rice wasn't immediately available to comment further.

The focus on costs has led to a rise in the use of exchange-traded funds at the expense of traditional mutual funds, which tend to be more expensive.

ETFs' market share grew to 12% this year, up from 8% in 2011.

Mutual funds' share fell to 33%, from 39% over the same period, according to Cogent.

And for the first time since Cogent began releasing the Brandscape report in 2007, advisers plan to allocate as many new dollars to ETFs as they do to mutual funds, with both expected to receive about 22% of new dollars invested.

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