Fiduciary Rule or Not, Brokerages Adopt the Fee-Based Model

Fiduciary Rule or Not, Brokerages Adopt the Fee-Based Model

Commentary on the Wall Street Journal article by Michael Wursthorn

The Labor Department’s fiduciary rule may be delayed, but wealth management firms are already embracing the fee-based model the rule would favor, the Wall Street Journal writes.

Wirehouses Transition from Commissions to Fees

Fee-based assets rose by a record $29.2 billion in the first quarter at Bank of America’s wealth division, which includes Merrill Lynch and U.S. Trust, the bank said, according to the publication. And J.P. Morgan has added $8 billion in new assets in long-term products, which includes products that come with a recurring fee, according to the company, the Journal writes.

Brokerages have been transitioning away from commissions in favor of the fee-based models even before the fiduciary rule, whose implementation date the DOL has delayed until June as President Donald Trump’s administration aims to replace or repeal it, according to the publication.

In part, opting for the fee-based approach is a matter of margins: according to Morningstar, the model can generate up to 50% more revenue that one based on commissions, the Journal writes.

But if the rule had gone into effect, the fee-based model would have also reduced potential conflicts of interest for the wirehouses’ brokers, according to the publication.

To that end, Bank of America has led the way among big wealth firms opting to eliminate commission-based retirement accounts entirely, the Journal writes. And the move has paid off despite the rule’s delay: the bank said that fee-based asset growth helped offset a drop in commission revenue, together propelling Merrill Lynch's revenue up 3% from the year before, according to the paper.

J.P. Morgan has also opted to stop offering commission-based retirement accounts, although it decided to delay the deadline for clients to switch to a self-directed or a fee-based account, the Journal writes. And while Morgan Stanley and Wells Fargo have decided to continue offering both types of accounts, both firms report growth in fee-based assets, according to the publication.

Meanwhile, smart money is betting on fee-based advice too. Private equity firms Stone Point Capital LLC and KKR are putting in $2 billion for a majority stake in Focus Financial Partners, which invests in independent fiduciary wealth management practices, according to the publication.

And no wonder: The fee-based model embraced by independent advice practices such as those partnering with Focus Financial is gaining on traditional brokerages, the Journal writes. Independent firms have grown their share of the advice market from 37% in 2010 to 41% in 2015, while the share controlled by traditional brokerages has declined from 63% to 59%, according the Cerulli Associates data cited by the Journal. By 2020, Cerulli estimates, that relationship will flip, with independent firms controlling a 52% stake while traditional brokerages contend with 48%, the publication writes.

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