Morgan Stanley sees slower fee-based asset flows on fiduciary rule delay

Flows to advisory accounts, while still elevated from the beginning of 2016, dropped off more than 20% from Q2 and were the lowest in a year

Oct 17, 2017 @ 2:00 pm

By Greg Iacurci

Morgan Stanley Wealth Management continues to see assets surge into fee-based accounts, but that flow began slowing noticeably in the third quarter, following more certainty of a delay in the implementation of major parts of the Department of Labor's fiduciary rule.

Flows to fee-based accounts set a year-to-date record in Q3, Morgan Stanley's chief financial officer, Jonathan Pruzan, said Tuesday morning on a quarterly earnings call.

These types of accounts, also known as advisory accounts, assess a level fee based on assets under management, as opposed to a transactional fee, such as a commission, in brokerage accounts.

QUARTERLY FLOWS

Fee-based asset flows year-to-date were $54.5 billion, driven largely by $18.8 billion in flows in the first quarter and $19.9 billion in Q2.

The quarter ended Sep. 30 saw $15.8 billion in flows to advisory accounts, which was a 21% drop-off from the prior quarter, and the lowest total since flows of $13.5 billion in Q3 2016.

In August, the Trump administration proposed an 18-month delay to major parts of the DOL fiduciary rule, which raises investment-advice standards in retirement accounts. The best-interest contract exemption, the rule's primary enforcement mechanism, will likely now be delayed from its original implementation date of January 2018.

The BICE was expected to drive a large shift from brokerage to advisory accounts, because the provision was widely perceived to carry a heightened compliance and litigation risk for brokerage transactions in accounts like IRAs, and less so for advisory accounts.

That transition has been playing out since the regulation was issued in April 2016. Parts of the rule went into effect in June.

ANNUAL GAIN

Morgan Stanley's $18.8 billion in fee-based asset flows in the first quarter of 2017 represented a more than 200% increase over $5.9 billion in the first quarter of 2016, for example. Other large shops such as Raymond James have seen a surge in advisory assets this year, and have attributed the accelerated growth to anticipation of the fiduciary rule. Bank of America Merrill Lynch and some other broker-dealers put strict limits on the use of commission IRAs to reduce risk.

Forty-three percent of client assets at Morgan Stanley Wealth Management are now held in advisory accounts, up from 41% in Q3 2016. The firm houses more than 15,000 brokers and advisers and $2.3 billion in client assets.

"We continue to witness growth in fee-based assets, which surpassed $1 trillion in this quarter," James Gorman, chairman and CEO, said during the earnings conference call. "This trend has reduced our reliance on transactional activity."

The firm's wealth-management revenues from "commissions and fees" were down 8%, 4% and 5% quarter-on-quarter respectively in the first, second and third quarters.

OTHER FACTORS

Mr. Pruzan, however, doesn't believe the DOL fiduciary rule is the sole driver of "very strong" year-to-date flows.

"A significant amount of the conversions this quarter came from non-retirement accounts," Mr. Pruzan said. "So while I think the DOL implementation, or the original implementation, did form a catalyst for some conversions, it hasn't been the primary driver."

He said he believes clients have been "attracted to the value-added proposition of a managed account."

While the DOL rule doesn't technically regulate non-retirement accounts, some observers anticipated the rule would have a sort of knock-on effect on these accounts, too.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Featured video

INTV

Advisers beware: tax law has unintended consequences

Commission accounts could be preferable for some clients, and advisers could be incentivized to move from employee broker-dealers to independent channels.

Recommended Video

Path to growth

Latest news & opinion

Bond investors have more to worry about than a government shutdown

Inflation worries, international rates pushing Treasuries yields higher.

State measures to prevent elder financial abuse gaining steam

A growing number of states are looking to pass rules preventing exploitation of seniors.

Morgan Stanley's wealth management fees climb to all-time high

Improvement reflect firm's shift of more clients into fee-based accounts priced on asset levels, which boosts results as markets rise.

Legislation would make it harder for investors to sue mutual funds over high fees

A plaintiff would have to state in their initial complaint why fiduciary duty was breached, and then prove the violation with 'clear and convincing evidence.'

Relying on trainees, Merrill Lynch boosts adviser headcount in 2017

Questions remain about long-term effectiveness of wirehouse's move away from recruiting experienced brokers.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print