Canadian regulators are considering a ban on commissions, the UK and Australia have already done so, but even in the US commissions are becoming a thing of the past. Not by regulatory dint, but because of industry, advisor and investor preference.
Over the past year the proportion of US advisor compensation derived from asset-based fees has risen from 56% to 59%, according to the just released 2013 Cogent Advisor Brandscape study. Based on a survey of 1,700 advisors, fees are expected to account of two-thirds of the industry by 2015.
“In national wirehouses in particular, and increasingly in the regional channels, they are trying to attract more and more affluent clients,” Meredith Lloyd Rice, Cogent senior director and author of the report, told WP. “Based on our research we see that investors, especially affluent investors, are expecting that this is the way that advisors will be compensated.”
At national wirehouses and regional broker-dealers the proportion of advisor compensation that is fee-based increased to 63% and 47%, respectively, each number up five percentage points from 2012. Independent advisors now receive 54% of their compensation through asset-based fees, up from 50% in 2011.
Regulators in Canada are considering following the lead of the UK and Australia in abolishing commissions. However more Canadian advisors are increasingly choosing to switch to a fee-based practice, though the transition has been occurring at a slower pace than it has been south of the border.
US Registered Investment Advisors (RIAs) – independents who are registered with the Securities and Exchange Commission or state agencies – now receive the vast majority of their compensation (84%) through asset-based fees. Only in the bank channel has compensation structure remained relatively unchanged over the past few years.
“Clients are increasingly expecting that they would pay their advisor on a percent of actual assets rather than on a transactional basis,” said Lloyd Rice. “Increasingly both investors and advisors are expecting more and more transparency in fees.”
One argument against banning commissions in Canada has been that it would leave mass-market clients underserved. However, Lloyd Rice says that the industry in the US – by its own design – has been shifting those clients into lower-overhead systems.
“The industry is focused on the relatively more affluent client, but they are finding ways to service those with fewer assets,” she said. “Merrill Lynch is an example; they have their Edge platform for investors who have less than $250,000 in investable assets. If you have at least $250K you have a Merrill Lynch advisor, and if you have less than $250K you have the Edge platform where you still have some guidance through a 1-800 number or an online platform.
"There are also direct channels, like Fidelity and Vanguard, but people will have to be a little more DIY.”
Looking forward. US advisors expect the trend toward asset-based compensation to continue to accelerate. These changes will likely continue to fuel advisor interest in moving to the RIA channel and have a profound impact on advisor product and brand preferences, Lloyd Rice said.
“Fee-based compensation is something we’ve seen that’s having a ripple effect across the landscape in terms of how advisors are managing their practices, their products and their provider preferences,” said Lloyd Rice, noting that advisors were looking more toward ETFs, alternative investments and providers.