Morgan Stanley’s wealth management can be described as nothing other than an unmitigated success in the fourth quarter. The numbers are in, and the data show that the unit is minting cash as the broker enjoys the transition from commission-based to fee-based accounts as provided by the fiduciary rule. Revenue increased a whopping 10% and the profit margin rose from under 10% the previous year to an eye-watering 26% in 2017.
FINSUM: We realize the importance of fiduciary duty, but how is a transition to much more expensive fee-based accounts—which are hugely boosting net profits to big firms—in the ultimate best interest of clients?
The fiduciary rule is in an odd sort of limbo. Despite being seemingly dead from a rule-making point-of-view, it is still very much alive as a practical rule that needs to be abided by even if it is not in full force. But is still surprising to learn, especially given all the hype over the rule’s possible dissolution, that 42% of all advisor-held US assets under management are now subject to the fiduciary rule. That figure is up from what would have been 24% in 2005 and 33% in 2010. The growth has come from the large number of firms seeking to grow their fee-based managed account programs.
FINSUM: That is a quite a high proportion of assets. We hope the DOL rule will not be implemented and the SEC will come up with a more effectual version.
We wouldn’t quite call it a war yet, but there is certainly a major battle going on between robo advisors and their human advisor competitors. Most advisors won’t admit it, but competition from robos is hurting, and they are doing a number of things in response. The big changes appear to be significant fee cuts and the adoption of digital solutions to better compete. 64% of advisors are now offering fee discounts and many are starting to completely unbundle their fees. While growth has been strong the last few years, robos are really starting to hurt, with Fidelity Clearing commenting that “With revenue and client growth dropping, RIA firm leaders will have to ensure that they make up in volume what they are discounting in fees”.
FINSUM: Robos were always going to drive fees down, but the way things have developed over the last few years, it looks like there is going to be continued robust demand for human advisors. Everything that is happening seems to be part of a general convergence, or hybridizing of the industry.
The battle over ETFs has recently progressed into all-out warfare. Vanguard and BlackRock, among others, have been continually trying to undercut each on large vanilla ETFs, and now Deutsche Bank is making its impact on the market. DB runs a large high yield bond ETF and it just cut its fee from 25bp to just 20bp, or roughly half of its two big competitors, BlackRock and State Street. Many analysts think the price of ETFs will soon fall to 0% for large vanilla offerings. Morningstar says “Despite all the new products, investor interest is still mostly for plain vanilla, cheap products. And that’s where we’ve seen the flows go this year”.
FINSUM: We definitely think funds are going to start marketing their huge vanilla ETFs free of charge, as they can make enough money from auxiliary businesses that capturing these assets for free makes sense.
Beset by an unstoppable surge into passive investment vehicles, the active management industry is in the midst of a broad overhaul. One part of the big change taking place is in fees. Fidelity announced recently that it was dropping its flat fee on assets for actively managed funds in favor of a performance fee only. AllianceBernstein is set to launch six new funds with a similar structure.
FINSUM: The active management industry is trying to fight the perception that it offers poor value, and moving to this model, which is basically success fee-based, will help. However, it will likely change the risk-return profile of asset management stocks as they will be much less insulated from the broader market environment.