How Banks Are Turning Fees Into a Profit Machine By Mark Kolakowski
Leading Wall Street firms are in the midst of complying with an Obama administration regulatory directive that they must act in a fiduciary capacity with respect to retirement accounts, working in the best interests of their clients rather than merely recommending suitable investments. Rather than being an onerous requirement, this new rule actually can help Wall Street in its decades-long quest to replace volatile transaction-based commission revenues with more stable fee revenues linked to the value of client accounts. (For more, see also: Fiduciary Rule Prompts Firms to Drop Some Commissions.)
Since transaction-based commissions have the stigma of encouraging account churning, or excessive trading by brokers or financial advisors, making asset-based fees the only payment option for retirement accounts is a demonstrable way to show compliance with the spirit of the new rule. Most notably, fee-based accounts align the interests of financial advisors and their clients more closely: advisors get paid more not by trading more often, but by increasing the value of clients’ accounts. (For more, see also: Why Broker-Dealers Disagree on Retirement Plan Commissions.)
As the big banks stabilize their income by increased reliance on fee-based sources that also reduce conflicts of interest, they can do well by appearing to do good. In fact, fee-based accounts can produce as much as 50% more revenue than commission-based accounts, according to research by Morningstar Inc. cited by the Wall Street Journal. Shifting to a fee-based model is also a crucial competitive response to fee-based independent financial advisors. Per Cerulli Associates data reported by the Journal, in 2010 the split of investors’ assets between independent advisors and traditional Wall Street brokerage firms was about 37% to 63%. By 2016 it was about 46% to 54%. Cerulli projects that independent advisors will take the lead by 2020, 52% to 48%, the Journal says.
Growing Fee-Based Assets
The growing significance of fee-based accounts for Wall Street is illustrated by two leading firms. At Morgan Stanley (MS
Morgan Stanley MS 42.24 +0.48%), $877 billion, or 42%, of client assets were in fee-based accounts at the end of fiscal 2016, up from $795 billion and 40% in 2015, according to their 2016 Form 10-K (page 46). For Bank of America Corp. (BAC
Bank of America Corp BAC 22.91 +0.77%), the parent of Merrill Lynch and U.S. Trust, assets in fee-based accounts grew by a record $29.2 billion in the first quarter, breaking the previous mark of $20.4 billion set in the first quarter of 2013, according to the Journal. Bank of America has $2.6 trillion in wealth assets, of which $948.6 billion, or 36%, are in long-term investment strategies, many of which are fee-based, the Journal adds. (For more, see also: Merrill Considers Alternatives to Fee-Only Model.)