DOL fiduciary rule pushing broker-dealer assets to fee-based accounts, away from commissions

Some large brokerages such as Morgan Stanley, Edward Jones and Raymond James have seen a surge in advisory assets a year on from promulgation of the retirement regulation

May 24, 2017 @ 2:43 pm

By Greg Iacurci

There's been a marked shift in the allocation of broker-dealer client assets in the year since the Department of Labor issued its fiduciary rule.

Largely, the shift has seen assets flow into advisory accounts, which assess a level fee based on client assets, and away from commission accounts. That, in turn, has generally pushed up broker-dealer revenues derived from fee-based accounts and depressed those from commissions.

While this is a continuation of a trend that's been occurring in the brokerage industry for the past several years, the fiduciary rule, which raises investment-advice standards in retirement accounts, has "been kind of a knock-on effect," said Bill Butterfield, a senior wealth management analyst at Aite Group.

(More: How regulators will make or break the future of hybrid advisers)

Morgan Stanley Wealth Management, for example, had $18.8 billion in fee-based asset flows in the first quarter of 2017, a 219% increase over $5.9 billion in Q1 2016, according to the firm's most recent earnings release.

Its $927 billion in total fee-based client account assets represented a 16% jump over the same period, and represents 42% of all Morgan Stanley client assets, an increase from 40%.

Raymond James' Private Client Group segment saw its assets in fee-based accounts jump 33%, to $260.5 billion, over the first quarter of 2016. Utilization of fee-based accounts "has accelerated in anticipation of the DOL fiduciary rule," according to the firm's most recent earnings release.

The S&P 500 returned 14.7% over the same period.

And Edward Jones, for which only information on full-year 2016 data is publicly available, saw assets in its advisory programs increase 46% during the year to $207.8 billion, according to a 10-K filed in April for The Jones Financial Companies, the parent company of Edward Jones.

The fiduciary rule was issued in April 2016, and as such brokerage firms have had roughly one year to digest its contents. The rule, whose phased implementation period begins June 9, makes it riskier for firms to conduct business in accounts such as IRAs on a commission basis, because it exposes them to the threat of class-action lawsuits from investors beginning Jan. 1. That same threat doesn't exist in the IRA market for advisory accounts.

The Obama-era DOL viewed commission accounts, which are transactional in nature, as potentially more conflicted, with brokers hypothetically able to sell the financial product paying them the highest commission. Because advisory accounts assess a level fee regardless of the transaction, the DOL seemed to feel those accounts don't pose a similar threat.

Of course, as observers point out, commissions may better serve investors in certain circumstances, such as for buy-and-hold investors who don't engage in regular retirement-account transactions.

A handful of firms such as Merrill Lynch took hardline positions last year against commissions in retirement accounts, but have since slightly backed off those positions. There's a chance the Trump administration may revise the fiduciary rule, pending the results of a review.

While the aforementioned firms didn't break out similar year-over-year metrics for commission accounts in their quarterly earnings results, the broader industry trend in this area is clear.

While commissions as a percentage of total revenue among independent broker-dealers has declined in consecutive years since 2011, last year marked the biggest drop over that period: 3.7 percentage points, to 57.7% of total revenue, in 2016 compared with the prior year, according to InvestmentNews' annual independent broker-dealer survey.

Sources of revenue for independent broker-dealers

And the trend has hit firms of all sizes. Veritas Independent Partners, for example, which had $526,000 in total 2016 revenues, had an 18% drop in commission revenue when compared with 2015, according to the InvestmentNews survey. However, the firm had an 18% increase in fee revenue over that period.

Kovack Securities Inc., which brought in $65 million in revenue last year, saw a 12% dip in commission revenue, but a whopping 21% increase in fee revenue.

In all, fewer than 10 of the more than 50 independent broker-dealers surveyed by InvestmentNews saw an increase in commission revenue.

Of course, the overarching trend isn't solely attributable to the DOL fiduciary rule, but it "certainly doesn't hurt," Mr. Butterfield said.

"It's just the new normal we're in," he said, explaining that broker-dealers and advisers are attracted by the characteristic of advisory accounts to bring in consistent revenues every quarter or every six months.

And advisory accounts are typically accompanied by a greater level of service with a fiduciary standard of care, which coincides with the general trend toward more holistic financial planning, Mr. Butterfield said.


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