As financial advisers rebuild from the 2007 market downturn, more are switching from commission-only business models to a mix of fees and commissions — despite suggestions that clients are resistant to paying a fee for financial advice.
According to a research report by researcher Aite Group LLC, independent registered investment advisers and online brokerage firms have been the market share winners over the last two years, with online discount brokerages such as The
Charles Schwab Corp. and
Fidelity Investments increasing client assets by 50% as investors have embraced do-it-yourself investing.
RIAs, who typically work on fees and commissions or solely on fees, also have seen above-average growth of client assets of 21% over the last two years, with much of the growth coming at the expense of traditional commission-based wirehouses. Those outfits are still 8% below their 2007 asset peak.
The Aite report seemingly flies in the face of an investor survey this year by Cerulli Associates Inc. that asked investors if they prefer fees or commissions. About half said they prefer commissions, versus 27% who said they would opt for a fee-based pricing model. Another 18% prefer retainers, and 8% want hourly fees. The researcher said that fees rub investors the wrong way, at least until the benefits are explained.
The apparent mismatch between advisers' moving to fees against the wishes of clients isn't so clear-cut, said Sophie Schmitt, a research analyst at Aite and one of the report's authors.
Some of it “depends on how it is explained” to investors, Ms. Schmitt said. “Some may not really understand the difference between fee- and commission-based charges.”
She said that many investors mistakenly believe that commissions are a one-time event, when they sometimes pay trailing commissions for years. For investors who conduct few trades, commission-based brokers may make more sense, but many have sought other options over the past few years, she said.
Investors with account sizes below the typical adviser account may find discount online brokers a cheaper way to go, which helps account for their asset growth over the last two years, she said.
Others feel that their investment needs are simple enough to manage at a discount broker. And some investors were disillusioned by their investment returns during the 2007 market downturn, when adviser-managed accounts didn't necessarily perform better than the overall market. Under those circumstances, “some investors said, ‘Why pay for advice?'” Ms. Schmitt said.
The big wirehouses saw their brands tarnished during the crisis, which drove some customers away, she said. “These firms were being written about every day as not acting in the clients' best interests,” she said.
Aite's report was based on an online survey of 438 financial advisers in the first quarter, as well as publicly available information and interviews with firm executives.
At the end of 2010, the combined brokerage and advisory industry in the U.S. handled $13.5 trillion in client assets, just below the year-end 2007 level of $13.6 trillion, according to Aite. Around 460,000 financial advisers manage client funds, with wirehouses
Bank of America Merrill Lynch, Morgan Stanley Smith Barney LLC,
Wells Fargo Advisors LLC and
UBS Financial Services Inc. dominating the market, with the average wirehouse adviser managing just under $100 million, for a 38% market share of client assets.
Retail brokerages manage $2.2 trillion, or 16%; non-wirehouse self-clearing retail brokerages manage $2.03 trillion, or 15%; independent registered investment advisers manage $1.55 trillion, or 11%; and self-directed online brokers manage $2.54 trillion, or 19%. (Click on the following link to see what top RIAs regard as their single greatest management challenge)
A lot of investor money moved after the 2007 financial crisis, amid an exodus of wirehouse brokers to independent brokers such as
LPL Financial and
Ameriprise Financial Inc. and others or to independent RIA firms. Online brokerage firms such as
Fidelity Investments,
Charles Schwab and others gained the most at 50% between the end of 2008 to 2010. Independent RIAs and other self-clearing retail-brokerage firms surpassed their 2007 asset levels by 21% and 16%, respectively, while wirehouses assets are down 8%.
