If you are thinking of selling your brokerage, you are in for bad news. Right now, brokerage firms are getting between 0.7x to 1x the past year’s revenues as a purchase price, while advisory firms are getting from 1.5x to 2.5x. The explanation for the very weak valuations is that brokerages don’t have any fiduciary rule experience, which greatly lowers their value versus advisory firms, which have acted as fiduciaries all along. Additionally, commissioned-based revenues, which are the norm for brokerages, are considered less “sticky”.
FINSUM: It is a terrible time to be trying to sell a brokerage. On top of all the factors mentioned, the other major one pulling down valuations is uncertainty. Wealth management is currently fraught with unknowns surrounding technology and regulation, which is also hurting prices.
The fate of the fiduciary rule is unclear, but some things are not: that big firms are making loads of money on conflict-free advice. For instance, Bank of America Merrill Lynch saw a big jump of $29.2 bn in fee-based client assets in the first quarter. JP Morgan saw $8 bn of inflows, including those with a recurring fee. The piece argues firms had already begun the switch well-before the rule was released, and that the new rule just helped them cement the changes. Fee-based accounts are great for firms as they can get as much as 50% more revenue out of an account than with a commission-based model, says Morningstar. Merrill Lynch is already seeing gains from its fee-based model, with revenue up 3% in the first quarter.
FINSUM: This article highlights the inherent flaw of the fiduciary rule and the measure is not even finalized yet. What good is a conflict-preventing rule if it ends up raising costs for so many retirees?
Source: Wall Street Journal
One of the world’s largest wealth management units is unilaterally shunning the fiduciary rule. UBS thinks that the rule is likely to be nullified, leaving the brokerage landscape unchanged. “There is some indication that [the rule] will, at a minimum, be delayed, and then potentially, not implemented at all”, said the bank’s CFO. The comments join those from Raymond James, which also spoke out last week saying they think the rule is doomed.
FINSUM: This is a big indication in our opinion. Senator Warren sent a letter questioning major firms on their views on the rule and they are now answering publicly.
Source: Wall Street Journal
There is a lot of speculation surrounding the fate of the fiduciary rule, and even more so now that Donald Trump has frozen all new agency rules. However, despite the apparent gloom that surrounds the fate of the rule, Morgan Stanley is pressing ahead with the “many” the changes to its brokerage model that it has been planning, according to the heads of the wealth management division. This will include “include lowering commissions for trades involving stocks and exchange-traded funds”, according to the piece. “With or without the rule, we fundamentally believe that serving our clients well and continuing to lead the industry forward require that we provide an increasingly higher standard of care for our clients”, said Morgan Stanley.
FINSUM: It looks like MS really thinks the fiduciary rule is here to say as a practice, even if the rule itself disappears. The fact that the rule has been so publicized does make it more likely that the ideological force behind it lives on.
Source: Investment News
The world’s population is currently graying rapidly. In the US there will be more people over 80-years old than under 5-years old in 15 years, and alongside that shift will be some massive and tumultuous changes in finance, according to this piece. The article serves as guide to the areas of finance which will be most effected. The piece says that aging will cause the death of active management as regulations and retirement move more money into passive assets. Brokerage will also be killed as the focus of investing moves to indexing rather than single names; the asset management industry is also likely to consolidate. Volatility will also die as turnover will fall, but there will be “episodic outbursts of repricing”. Additionally, aging will be the death of small caps as passive investments “herd’ people into larger securities. Finally, inequality will also lessen as lower returns may have redistribution effects.
FINSUM: This is a very interesting article that points out some of the big changes that are already well underway within finance.