Fiduciary Standard Governs 42 Percent of Advised Retail Assets

The fiduciary standard governed 42 percent of advised retail assets at the end of 2016 as brokerage firms shift clients into fee-based accounts and investors expect a fiduciary obligation on the part of advisors, a new report found.

That figure stood at 26 percent at the end of 2006, according to Cerulli Associates in Boston.

The shift is an indication that the industry is “moving to better align itself with client expectations while also embracing what it believes is a better model for advisors and firms,” Cerulli researchers wrote in the December product trends edition of The Cerulli Edge.

Under a fiduciary standard, advisors must document that they are putting the interests of clients first. Under the suitability standard, advisors can recommend investment products under a more general criteria, products that pay the advisor or firm a better commission.

With fee-based arrangements, advisors charge a fee to manage one or more accounts. The fee-based model is designed to steer advisors away from conflicts of interest generated by traditional commission-based sale.

Regulators have pushed the industry toward fee-based models and the industry itself has been moving in that direction for many years. The Department of Labor fiduciary rule took partial effect June 9, with some aspects delayed until July 2019.

At the end of 2016, nearly $18 trillion in total assets were overseen by all financial advisors, Cerulli found.

Of that $18 trillion, about $7.5 trillion – 42 percent – was subject to a fiduciary standard, either as part of a broker-dealer fee-based managed account or in a registered investment advisory (RIA) practice, the report found.

Investor Awareness

Investor awareness appears to have played a big role in pushing advisors toward fee-based models, the report found.

In 2013, only 64 percent of investors believed their advisors were subject to a fiduciary standard. By November 2017, 75 percent of investors believed their advisors were subject to the standard, the report found.

“Regardless of an advisor’s actual legal obligations, the majority of retail investors have long expected that advisors are bound to act in a fiduciary capacity, as is inherent in fee-based accounts,” the authors of the report wrote.

In 2013, as many as 15 percent of investors did not know what obligations were required of their advisor or broker. In November, only 5 percent of investors reported they didn’t know what was required of their advisor, the report found.

A fiduciary standard will mean more diligence for financial advisors to justify recommending using one product over another, the report said.

Product providers such as mutual funds and insurance companies will also need to provide “measurable and thorough justification” for the use of each product, the researchers wrote.

An Unexpected Twist

The growth of fee-based accounts has led to an unexpected finding that brokers appear to be less motivated to find new clients, the report said.

Once financial advisors have built solid client rosters with robust fee-based assets, especially in a rising equity market, advisors lose incentive to find new clients. Existing asset growth simply generates more fee income for the advisor, the report concluded.

Mutual fund assets ended November with more than $14.5 trillion, while exchange-traded fund (ETF) assets totaled about $3.3 trillion, Cerulli said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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