Cogent study shows one big RIA distinction getting swallowed up -- or not

Brooke’s Note: It’s all the rage to talk about how the wirehouses, regionals and hybrid IBD reps are shutting down the RIA advantage. First there was the half-mythical recruiting drought. Now this Cogent study relating to fees. Then there’s the old stand-by that “wirehouse executives are not dumb” and that it’s only a matter of time before they flex their muscles and beat up on the RIA rag-tag army. (That argument reminds me of the one I’ve been hearing about interest rates for 10 years about how they “just can’t go any lower so they have to go higher”). So I decided to look closer at this Cogent study to see if it’s half the red flag that it gets credit for. It’s author, Meredith, was very helpful in putting it in good perspective.

The 20-year-long trend of brokers putting client assets into fee-based baskets of assets is both at an all-time high and, perhaps, at an all-time rate of exponential growth, a new study of financial advisors by Cogent Research LLC shows.

The Cambridge, Mass.-based firm’s study, Advisor Brandscape 2013, finds that 66% of all advisor assets will be “fee-based” by 2015, up from 59% currently and 56% last year. Traditionally, advisors in the wirehouse, regional, insurance and even independent-broker-dealer channels could be expected to earn the bulk of income through commissions. See: FRC report: Merrill Lynch, Morgan Stanley, UBS, Wells Fargo are undergoing a radical transformation to a brighter future.

The study surveyed 1,700 advisors with average books of business of $105 million in assets under management and a minimum of $5 million. Both the current compensation means and anticipated comp were self-reported by the advisors. Financial advisors at wirehouses count wrap accounts, managed accounts and assets in a corporate RIA as “fee-based.”

The differentiator

The statistics are not surprising, and they suggest a notable change is in the works in the advisor business, according to Timothy Welsh, president of Nexus Strategy LLC of Larkspur, Calif.

“I’ve got to believe that wirehouse advisors are moving up the food chain,” he says.

Indeed, these hard data sparked a couple of articles — by Jason Kephart, reporter for InvestmentNews, and Michael Kitces, partner and director of research for Pinnacle Advisory Group Inc., titled, respectively: “RIAs are losing competitive edge” and “Are Financial Planners Experiencing A Crisis Of Differentiation?” Kitces makes the point that a quick review of advisor websites reveals the virtually identical outline of a value proposition.

“How many advisors still use some version of the following as their differentiator: 'We provide customized, individualized financial advice to our clients, delivered from well-educated, highly-credentialed advisors who have several decades of experience.’ Certainly, the wording varies from one advisor brochure to the next, but they all build around the same key points.” See: Selling your value proposition.

Still, advisors charging fees don’t all look alike when you dig deeper, according to Meredith Lloyd Rice, senior director of syndicated research at Cogent Research, who oversaw the study,

“[Fee-proliferation] is a trend but the RIAs are still very distinctive in their attitudes and preferences, she says. RIAs reported that 84% of their compensation comes from fees.

Cogent surveyed a wide range of
advisors.

Culling the herd

One measurable difference is how RIAs — unlike brokers — strive for low-cost providers and low-cost brands — often using passive investing.

“RIAs are heavy ETF users and like brands like Vanguard and DFA that deliver on low costs,” says Rice. “If [advisors at broker-dealers] focus more on cost and question active management, that could be an interesting development.”

The big driver of the acceleration of fee use may tie into macro trends occurring on the wirehouse side. Merrill Lynch, for instance, has very publicly culled smaller advisors and the small investors they serve and herded them in Merrill Edge. The move to the affluent client has, necessarily, resulted in a higher proportion of assets ending up in wrap products. In addition, investors are getting older and richer — with most carbon-dated at 60-plus, Rice says. “The more affluent they are, the more they expect asset-based fees” See: Veteran Merrill Lynch manager leaves seven registrations on the table to return to his pure-RIA roots.

Confusion still a factor

But even discounting these factors, wirehouse brokers are gaining real ground, according to Welsh. Advisors using fees are freed from drumming up commissions anew each year and can focus more on financial planning. This aspect of the wealth management process tends to yields better outcomes for clients related to planning, hence driving referrals and client retention. See: The prognosis for Morgan, Merrill, UBS and Wells is even grimmer than the negative hype, Cerulli report shows.

Even so, Rice points out that a separate study conducted with consumers creates some questions about consumer understanding about fees. Only 29% of consumers with $100,000 invested say they pay their advisor a percentage of assets and another 20% say the aren’t sure. See: The SEC needs to clean up its semantics before accusing RIAs of inflating AUM.

“I see nothing wrong with the Cogent numbers,” Kitces writes in an e-mail. “Frankly, they seem low based on my experience talking at wirehouse and B-D events. Every decently successful wirehouse advisor I see is running a pure or nearly-pure AUM business, unless they’ve got an unusual transactional niche (e.g., they’re a 'bond guy’ or they specialize in some unique alternative investment thing).” See: The 10 things Morgan, Merrill, UBS and Wells Fargo could do if they really, really wanted to stem the RIA tide.