Fee-Based Compensation Models Push Deeper Into The Industry

Here's a sign fee-based compensation models are pushing deeper into the industry. Revenue from managed or fee-based accounts were responsible for 51 percent of financial advisor revenue last year, new research has found.

In 2013, only 41 percent of financial advisor revenues were generated by fee-based accounts, said Chip Roame, managing partner of Tiburon Strategic Advisors.

Wirehouses, big firms, consumer advocacy groups and regulators helped boost revenue from fee-based accounts over commission-based accounts, he said.

Fee-based accounts hold about $4.5 trillion in assets under management, more than twice the $1.7 trillion in assets under management they held in 2007, according to Tiburon research.

Advisory fees range from 1.26 percent to 0.66 percent of assets under management with fees dropping as account assets grow. The average fee is about 1.02 percent, Roame said.

Fee-based accounts come in different forms.

They include separately managed accounts (SMAs), mutual fund wrap accounts, exchange traded fund (ETF) wrap accounts and unified managed account (UMA) programs.

These accounts or programs are expected to grow in the future with the spread of index investing and passive management, which lowers costs.

Stagnation Seen for Rep Programs

Two other types of fee-based programs known as “representative-as-portfolio-manager" programs and “representative-as-advisor” programs, or rep programs, are expected to grow slowly or even shrink in the future, Roame said.

Wirehouses and broker/dealers are moving back to centralizing managed accounts. New fiduciary standards are one reason for this move, he said. Another is because so many rep programs, typically managed “in the field” away from a main office, deliver mediocre returns.

SMAs have about $1.1 trillion in assets under management, about the same amount as in rep-as-portfolio-manager programs. Meanwhile, mutual fund wrap account programs manage $600 billion, about the same amount as rep-as-advisor programs. Compare that with the $800 billion in UMAs and the $300 billion in ETFs.

By 2022, mutual fund wrap accounts are expected to reach $1.6 trillion in assets under management and ETFs will have gathered an estimated $475 billion in assets under management, Roame said.

Rep-as-portfolio manager programs will have gathered an estimated $1.3 trillion in assets by 2022, an increase of about 30 percent from $1.0 trillion in 2017.

But rep-as-advisor programs are projected to shrink to $675 billion in assets under management by 2022, from $725 billion in 2017, Roame said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.
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