Fiduciary Standard Governs More Than 40% of Retail Assets: Cerulli
The percentage of client money being held in advisory accounts among traditional financial advisors had risen to 42% at the end of 2016 from 25% 12 years earlier, but brokers as a consequence have grown lazier about building new business, according to a new report.
Many of the largest broker-dealers have made growth of fee-based managed accounts a strategic priority to minimize churning conflicts of interest and to book fees from investment product providers, but the growth of advised assets subject to a fiduciary standard has had unintended consequences, according to Cerulli Associates, a consultant to the fund industry.
“The growing use of fee-based client relationships has, however, had one notable downside for broker/dealer firms: a reduction in advisors’ motivation to add new clients to their practice,” the boston-based consultant wrote in the December issue of “The Cerulli Edge,” its monthly product trends publication. “Firms have found that especially in a rising market environment, once advisors have built substantial books of fee-based assets, they are less inclined to work hard to pursue new client relationships and instead rely on the ongoing income attributable to their managed account assets.”
The findings corroborate results at the major wirehouses. Merrill Lynch, for example, which has for years offered brokers incentives to move customer assets to its Merrill One fee-based platform and away from commission accounts, has experienced net new growth of less than one household per average broker this year and has made new asset and new account growth a centerpiece of its 2018 compensation plan.
From a regulatory and client-care perspective, the growth of fee-based accounts subject to a fiduciary rather than a lower suitability standard of care is a positive and does not appear to have been affected by the Trump administration’s efforts to delay or eliminate parts of the Department of Labor’s fiduciary rule for retirement accounts, according to Cerulli.
“While industry trade groups, regulators, and government agencies quibble over the details of how a broadened fiduciary standard should be implemented, assets are already flowing toward fiduciary platforms at an accelerated rate,” the consultant wrote in the report. “For example, as of year-end 2016, nearly $18 trillion in total assets is overseen by traditional financial advisors. Of this amount, $7.5 trillion, or 42%, is subject to a fiduciary standard, either as part of a broker/dealer’s fee-based managed account program, or in a registered investment advisory (RIA) practice.”
Cerulli opined that concerns about so-called reverse churning, where clients who are infrequent traders end up paying more in a fee-based account than they would have in a traditional commission account, are overblown.
“Individual instances of these concerns are more frequently dispelled when compliance teams reach out to advisors who ten confirm that the inactivity within a portfolio is attributable to the fact that the current asset allocation conforms with the client’s establish risk tolerance and that any incremental trading would likely be detrimental to pursuing the investor’s goals,” Cerulli wrote.
The implication for the product providers that are the consultant’s major customers is that they need to be better prepared to provide justifications for using their products on fiduciary platforms, the report said.
“Formerly, a four- or five-star Morningstar rating was usually enough to earn shelf space and advisor use,” the article in “Cerulli Edge” said. “Facing increased scrutiny under a fiduciary standard, advisors will need to be able to provide detailed explanations of their investment selection criteria and how each of their selections measured up to competitors during the process. To improve future inflow opportunities, providers will need to more deeply understand each advisor’s selection methodologies in order to present the most compelling products for each situation in a timely fashion.”