Broker-Dealers

Investors see few benefits of lower fees in adviser-sold investments

Managed accounts sold by advisers deflect trend toward lower-fee money management as brokers work to maintain profits: Cerulli.

On the whole, fees that mom-and-pop investors pay for mutual funds and other similar products have dropped substantially over the last several years. But in at least one corner of the investment universe, fees aren’t budging all that much.
The largest and fastest-growing types of managed accounts sold by financial advisers and broker-dealers have dropped at most six basis points since the financial crisis while some fees have increased, according to a new report released this week by industry research firm Cerulli Associates.
Cerulli said four types of accounts — subadvisory separate accounts, mutual fund advisory, “rep-as-PM” and “rep-as-adviser” — have largely maintained the fees they charge, often even as the underlying investments have become cheaper.
The fees go to broker-dealers and other managed-account program sponsors as well as financial advisers, who increasingly are deciding how the money in those accounts are invested.
According to Cerulli, broker-dealers, or B-Ds, are under increased pressure to drive profits to their parent companies while replacing lost revenue from sources such as 12b-1s, which are not typically embedded in the cheaper, institutional share classes increasingly preferred by advisers.
“Consequently, B-Ds have begun pressuring their advisers to raise the explicit fee for advice,” according to the report. “Advisers are loath to raise fees on clients, especially since the reason for using institutional share classes is providing a better value. B-Ds are beginning to manipulate the payout grids of advisers to encourage a fee increase.”
Last year, the average annual explicit client fee for subadvisory separate accounts was 1.65%, down from 1.7% in 2008, according to Cerulli. The average annual fee for mutual fund advisory accounts was 1.10%, down slightly from 1.16% in 2008; the average annual fee for rep-as-PM accounts was 1.20% last year compared with 1.25% in 2008; and the average annual fee for rep-as-adviser accounts was 1.07%, up from 1.04% in 2008.

Comparatively, savers paid 0.74% in 2013 to invest in mutual funds that buy stocks. That’s down from 1% the decade before, according to the Investment Company Institute, a trade group. In retirement accounts, plan sponsors have sought out cheaper types of funds and accounts.
ETFs with rock-bottom management fees have grown popular, too, along with “robo-advisers,” like the one introduced recently by the Charles Schwab Corp. that uses ETFs but doesn’t add any advice fees on top.
INVESTORS POORLY INFORMED
As fees move, investors appear to be poorly informed about the cost of financial advice. Citing 2014 data it produced in conjunction with Phoenix Marketing International, a market-research group, Cerulli said 51% of investors weren’t aware what they pay or thought they paid nothing. And only 6% said fees were a cause of satisfaction or dissatisfaction.
Most adviser-serving brokerages offer managed account programs, but the largest today are at the wirehouses, four firms that control 53% of the assets in the $4 trillion category.
But the programs are growing fastest at LPL Financial Services and Fidelity Investments, which serve independent advisers, according to the Money Management Institute, a trade group, and Dover Financial Research, a consultant.
Sponsors like Envestnet Inc. have also emerged as key gatekeepers alongside traditional broker-dealers, in the space between independent financial advisers and money managers like BlackRock Inc., Nuveen Investments and Legg Mason Inc., the largest traditional separate-account managers.
The managed account types cited by Cerulli are a diverse set, including an increasingly popular fee-based option called rep-as-PM, in which advisers take control of the asset allocation and sometimes security selection within portfolios. Once a marginal offering, that service has grown after advisers pulled money out of programs managed by their broker-dealers in the aftermath of the financial crisis.
In total, the four account types mentioned by Cerulli — including rep-as-PM — hold 89% of the managed-accounts industry’s assets, according to MMI and Dover.