For over a year, CEOs of top broker-dealers have been peppered with questions by analysts who cover their companies about fees. Can firms sustain their current level of fees they charge clients in the new era of the fiduciary adviser? Will they be cut, and by how much?
The popular consensus is that, regardless of whether the Department of Labor's fiduciary rule for retirement accounts takes effect in June, is delayed further or even repealed, fees charged consumers for retirement advice will become more standardized across product lines such as mutual funds and variable annuities. Fees will eventually be pared back, benefiting clients but potentially crimping the bottom line of brokerage firms.
In some cases, this is already happening. In the past 12 months, LPL Financial and Advisor Group announced they were lowering and making standard certain fees on investment products. Meanwhile Merrill Lynch and Commonwealth Financial Network last fall said they would no longer offer commission-based products in retirement accounts, although both firms have given themselves wiggle room over such a change since the DOL rule has been delayed.
But brokerage firms appear to be drawing a line in the sand when it comes to advisory and wrap account fees, which, at large firms, can range from 75 to 190 basis points of a client's assets under management, according to conversations with advisers, executives and industry consultants. The standard advisory fee in the industry is 100 basis points, with the adviser and asset manager splitting the charge.
And brokerage firms are seeing success in moving clients' assets from accounts that charge a commission to those that charge an annual fee: Merrill Lynch, Bank of America's wealth management business, said in April it saw a surge in the flow of advisory assets in the first quarter, $29.2 billion — an increase of 54.5% from the final quarter of 2016.
Indeed, in an era of fee pressure from competitors like robo-advisers, broker-dealers are holding their ground, for the moment, when it comes to fees in advisory or wrap accounts. Executives at firms are stressing and promoting the advice and financial planning that advisers deliver to clients as the key ingredient to a client's long-term financial well-being.
When asked by an analyst in January how he would address the issue of "high" fee levels, James Cracchiolo, chairman and CEO of Ameriprise Financial Inc., defended the firm's fees and said they were in line with other full-service competitors. Ameriprise charges a wrap account management fee of approximately 110 basis points, which does not include fees for financial planning and other services.
Mr. Cracchiolo noted that fee rates to wealthy clients will be lower than those for the mass affluent, generally defined as investors with $200,000 to $1 million in assets other than their homes. Ameriprise said last year it was eliminating 12b-1 fees based on its fee-based wrap accounts in 2017.
Similarly, an analyst in February asked LPL's recently anointed president and CEO Dan Arnold how the firm could compete with Vanguard and Schwab, which charge fees closer to 30 basis points for advisory, while LPL's "average corporate advisory fee is just over 100 basis points," according to a transcript of the call.
"There is still a segment that is in need of more complex financial planning, more sophisticated and complex financial advice, that runs the gamut of everything from asset allocation and portfolio construction to financial planning to even just helping one manage through the ups and downs and the emotions of a career or marketplace," Mr. Arnold said. "And I think that's where you see more of a 100-basis-point range, if you will. We still think there is a certainly viable place for that type of broad-based value, and certainly pricing."
When it comes to charging advisory and wrap account fees, the new normal for broker-dealers and advisers will be to show what their work is worth.
"If there's true fee pressure, the only way for firms and advisers to offset that is to show value," said Dennis Gallant, an industry consultant. "Now, broker-dealers are going to be much more explicit about what they are doing for that fee. This will also make the adviser/client relationship much less episodic, like getting advice when you have kids or start saving for college."
"The brokerage industry in general is facing a dilemma. There's the focus on the fiduciary, there's the focus on fees," said Mr. Gallant. "Advisers have been saying that they are doing a lot for the 1% fee. What happens if they start cutting that fee?"
"The total cost to clients has declined on average over five years as a shift from higher cost product to lower cost, from mutual funds to ETFs, but what advisers charge for advice has not changed," said Scott Curtis, president of Raymond James Financial Services Inc. "Maybe at some point as advisers continue to grow and use technology more efficiently, perhaps we see a reduction, but look at doctors, accountants and attorneys. I suspect they're not charging less than five years ago."
While advisory and wrap account fees may remain the same for now, brokerage firms will clearly face pressure from clients to make the fees more intelligible, executives said. Fees for service to clients that are "embedded," to use Mr. Cracchiolo's term, may just be a thing of the past.
"If you take the fiduciary era of the DOL starting, I think we're in a period where you're going to start seeing the unbundling of pricing and more transparency of the entire value chain of the charges that make up a wrap fee," said Jamie Price, CEO of Advisor Group.
"How much is the adviser fee and what am I getting for it from my adviser," asked Mr. Price "How much is the underlying asset manager fee? What's the platform of services I'm paying for, such as automatic re-balancing, research, or quarterly monitoring that breaks down in detail gains and losses and benchmarks against indices? Those are the questions."
"Over the next two to three years, both with technology driving that and the fiduciary standards, I think you are going to see people ask for more unbundled pricing," Mr. Price said.
An earlier version of this story indicated that Ameriprise charges a 140-basis point management fee for its wrap accounts. That fee is approximately 110 basis points, though that figure does not include fees for financial planning and other services.