Analysis: Fee-Based Flows Slump in Second Quarter
After several strong quarters of advisory “flows,” brokerage firms from wirehouses to independent broker-dealers said efforts to attract more fee-based assets lagged in the second quarter.
LPL Financial, the nation’s largest independent broker-dealer by headcount, on Thursday reported that net new advisory assets of $4.1 billion were down 30.5% from the $5.9 billion it added in the second quarter last year. That’s the least added since the third quarter of 2016.
Flows at Merrill Lynch fell by more than half to $10.8 billion despite new incentive and compensation programs to increase advisory account growth. And at Morgan Stanley Wealth Management, new customer money flowing into fee-based advisory accounts fell 23% from the 2017 quarter and 16% from this year’s first quarter to $15.3 billion.
A number of factors likely contributed to the slowdown, which executives at each of the firms said during earnings calls should not be taken as a sign of a long-term reversal in the trend toward managed money.
The second quarter coincided with the official death of the Department of Labor’s fiduciary rule, which had pushed fees over commissions in establishing a ‘best interest’ standard for retirement accounts, and for which firms began to unwind some of the restrictions they had put in place on product sales. Merrill, for example, said it was reviewing whether to walk back its ban on commission accounts.
“We do believe that as we get clarity around the regulatory environment associated with brokerage products and solutions that it does make it more predictable and probably a bigger utilization of brokerage than we probably see today,” LPL chief executive Dan Arnold said in response to an analyst question about why asset conversions from brokerage to advisory accounts also fell. The independent broker-dealer reported that $1.8 billion migrated to advisory from brokerage, down from $2.5 billion in the previous quarter and from $2 billion in the year-ago quarter.
Morgan Stanley and Merrill Lynch also have largely pulled back from competitive recruiting, slowing the addition of new customers to the firm. Officials at both firms said another factor was that clients pulled cash from deposit accounts and put less into investment accounts in order to pay taxes.
Fee-based asset growth is a key metric for broker-dealer executives, who see advisory accounts as generating a more steady source of revenue than commissions and as a key part of the transition to “holistic” financial advice, from investment selection. The push has been over a decade in the making but with a tail wind from the DOL rule, which was issued in April 2016, firms have stepped up training and offered sales tools to help nudge brokers toward more fee-based accounts.
That had contributed to strong growth in recent years, pushing fee-based assets to almost half of the total for LPL and Morgan Stanley. Excluding assets it absorbed in recent quarters from its acquisition of National Planning Holdings, assets in advisory accounts compromised 48% of the $587 billion in client assets at LPL Financial, up from the 40% they accounted for in the second quarter of 2016. Morgan Stanley’s fee-based assets were 45% of its $2.4 trillion total, up from 40% of $2.03 trillion in the second quarter in 2016.
At Bank of America’s global wealth business, which includes Merrill Lynch and U.S. Trust, assets under management in fee-based accounts represented 40% of total client investment account balances of $2.75 trillion, up from 34% two years ago.
A Morgan Stanley spokeswoman said she could not immediately comment on its targets for fee-based assets as a percent of overall assets, while a spokesman for Merrill Lynch did not immediately return a request for comment.
“I wouldn’t read too much into it,” Arnold cautioned, noting the broader shift to advisory would likely “stay in place.”
There were exceptions in broker earnings to be sure. Ameriprise Financial reported net inflows into advisory accounts of $5.3 billion, an increase of 18% from last year. Raymond James Financial did not break out advisory flows specifically in its most recent earnings, but reported that advisory assets of $343.1 billion were up 24% from the year-ago quarter due in part to advisors it hired from wirehouses who were transitioning fee-based accounts.
UBS Wealth Management USA reported a net decline in new assets of $7.1 billion in the second quarter but did not break out advisory assets specifically. Wells Fargo advisors also does not disclose fee-based asset flows.