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

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

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.