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To compete with robo-advisers, Nally proposes charging clients for all services

Jun 12, 2014 @ 9:04 am

By Trevor Hunnicutt

fees, assets under management, wealth under advisement, robo-adviser
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The man who leads the TD Ameritrade Inc. division serving registered investment advisers is pitching a new way for those firms to get paid as they stare down increasing competition from the online portfolio managers called robo-advisers.

Thomas Nally, president of TD Ameritrade Institutional, said firms should consider replacing the widely used fee based on assets under management with one based on total wealth under advisement.

“Don't charge on just that one little slice of the pie. Why don't we charge a lower basis point number on total wealth that you're advising on so you can have the same number as some of these robo-advisers, but provide much more services?” said Mr. Nally.

According to the proposal, if an adviser provides tax or estate strategies associated with a home or business, for instance, they would assess a total fee that was linked to those assets, in addition to the client's securities portfolio. By accounting for the wider array of assets covered, the overall fee could be lowered — making it competitive with the low headline figure advertised by online advisory firms, Mr. Nally said.

Mr. Nally's remarks to a set of his firm's top advisers Monday and in an interview with InvestmentNews Wednesday, reinvigorated discussion of alternative fee structures for financial advisers, a topic of years of discussion and consternation.

Some advisers see fees linked to assets under management as devaluing aspects of their service offerings beyond securities and investment manager selection, such as estate and tax planning. Others see the fee as an easy way to be rewarded for investment decisions that benefit clients and to participate, alongside those clients, in the upside of a rising market, such as the one enjoyed by U.S. stocks since 2009.

Figures on the number of advisers using fees for engagement or other alternative fee models are hard to come by. But anecdotally, the use of such models is marginal. That's despite the advocacy of people like Sheryl Garrett, a fiduciary advocate who recommends hourly fees for advisers in her namesake network.

At the same time, in their move to transition to fee-based business and more planning-centric relationships, wirehouses have embraced some fee-for-service arrangements. Compensation for those firms' brokers now often includes payments for drawing up financial plans.

But Mr. Nally sees the timing as propitious, in part because of firms like Wealthfront Inc. and Betterment, which he did not mention by name, employing instead the term robo-advisers. That's a term some see as pejorative.

“I'm trying to stir the pot a little bit and get people to think — provoke a different way of doing things so we don't get caught flat-footed,” said Mr. Nally, whose firm also competes with the online advisers on the retail side of their brokerage business. “Sometimes you need a catalyst like the robo-adviser movement, whatever you want to call it, to get people to think a little bit differently because sometimes people get complacent.”

Noting the example of an online firm that might charge 50 basis points “for a basic portfolio” of exchange-traded funds, Mr. Nally said, “that's not a big bargain compared to what you get here” from most bricks-and-mortar advisory firms, which Mr. Nally sees as providing more comprehensive wealth management services.

Several firms in the space, including Betterment and Wealthfront, actually charge far less than 50 basis points on an annual basis.

“If you talk to the advisers' client, they'll say, 'I couldn't live without my adviser, they do so many things for me financially that I would be lost without them,'” Mr. Nally said. “That's great after you're already a client, but we can't allow the robo-adviser to slide in there and do that apples-to-oranges comparison without truly articulating the differences in that value proposition.”

Some said the idea of advisers basing fees on clients’ wealth simply wouldn’t work.

“They didn’t create it, cannot adequately advise on it and probably shouldn’t charge on it,” said Paul S. King, vice president of Seattle-based Comprehensive Securities Compliance Solutions Inc. Some state securities regulators would likely view the practice as a violation of ethics standards, he said. “Advisers should keep in mind that not everything that gets thrown against the wall to see what sticks necessarily smells good.”

One of the advisers privy to the discussion this week said he had no plans to change his fee structure for now.

“I always felt because of what we give our client between comprehensive wealth management and investments that our fee is justified and I still think it is today,” said Richard S. Brown, chief executive of fee-only JNBA Financial Advisors Inc., which manages nearly $565 million, according to regulatory filings. “I'm always intrigued by hearing different ways of charging clients, but it isn't enough at this time to make me want to change.”

Mr. Nally spoke on the sidelines of the 2014 Elite Summit, which the RIA custodian held this week for some of its top advisers in Dana Point, Calif.

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