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The dinging of the under-$15-million crowd is painful for initiates but a pleasing prospect for competing custodians ready to welcome defectors
September 24, 2013 — 5:02 AM UTC by Lisa Shidler
Fidelity Institutional Wealth Services will eliminate a grandfather clause that kept a subset of RIAs from paying a nasty fee — one that previously applied only to rookies.
The Boston-based RIA custodian will charge all advisory practices with less than $15 million in managed assets a $2,500 quarterly fee as of Oct. 1.
The change to the Fidelity Institutional Wealth Services RIA pricing grid represents the most recent tinkering with a fee class that first came to light in 2010. It was then that the company began charging a quarterly fee of $2,500 to existing advisors whose assets were below $10 million. It was applied in the context of RIAs needing a minimum of $15 million in assets to open a custody account — a policy that went into effect in 2008. See: Fidelity will soon charge a big fee to small advisors.
However, the new firms were not assessed the $2,500 platform fee unless their assets fell below $10 million.
In the name of fairness
Of Fidelity’s current 3,200 advisory clients, about 6% would have to pay the $2,500 fee, the company says. If all 3,200 RIAs had to pay the fee, Fidelity would — by extrapolation — generate revenue of nearly $2 million each year.
The move is not aimed against small advisors, Fidelity says, but rather a policy change intended to level the playing field for new and existing advisors — given that it had a $10 million minimum for existing advisors and a $15 million minimum for new advisors.
The company has new bills to pay as it invests more to raise RIAs up out of the fee-paying asset level, says Mike Durbin, president of Fidelity Institutional Wealth Services.
“Fidelity has approximately 1,500 clients in our Growing Advisor Program — and, as the name implies, this program is designed to help small advisors grow strategically,” he says. “We’ve recently added to this team and our regional footprint, and continue to invest in this program. We will be working very closely with those active clients with less than $15 million to see how we may be able to help them grow their business.” See: Fidelity plows ahead in the RIA business with overhauls of service, technology and management.
Not held hostage
Still, advisory clients with smaller assets feel singled out by these new policies.
Bryan Wisda, a solo advisor with Summit Wealth Management of Arizona LLC in Carefree, Ariz., keeps about $14 million of managed assets with Fidelity. He’s upset not only by the new fee but by the fact he only learned about it from Fidelity last week.
Fidelity spokeswoman Erica Birke says that the company sent out fee notifications to advisors in July but client service representatives made calls more recently to ensure advisors knew of the changes.
Wisda keeps about $30 million of additional managed assets, mostly in Dimensional Fund Advisors LP mutual funds, with TD Ameritrade Institutional. He’s unsure what he’s going to do at this point, but moving more assets to TD is clearly one option.
While Wisda likes TD, he’s always kept a small pot of assets at Fidelity because he prefers its 401(k) platform. It includes a brokerage link, and once clients select him as the RIA, he can direct their assets into any account. See: Fidelity Investments recognizes power of RIAs in 401(k) market and has increased efforts to work with advisors.
“They may be trying to pressure me to bring more money rather than use them as a backup,” he says. “I voiced my frustration. I don’t want to leave their platform because they’ve got a few things I really like. However, I’m not going to be held hostage.”
Fidelity’s new policy will push some smaller clients to leave, says Scott Smith, an analyst at Boston-based Cerulli Associates Inc.
“There will be advisory movement,” he says. “Some will consolidate to get over $15 million and others will leave. I think Fidelity is doing what all consultants tell you to do: They’re focusing on the larger advisory shops. It’s a crying shame for those RIAs who have been loyal and only have $12 million in assets, but such is life. Everyone has to address the non-profitable clients.” See: Schwab encourages RIAs to adopt client segmentation but some don’t approve.
Smith says that seeing Fidelity go up-market is consistent with what is happening in the industry, but he also points out that there are literally thousands of advisors with very little in assets.
“This may also be a wake-up call for an advisor and maybe you’re not best serving your clients as a stand-alone advisor,” Smith says. See: Why Joe Duran believes that classic RIA firms face extinction.
Other minimums, other custodians
Fidelity is not alone in charging a fee to smaller advisors. Other custodians, such as Schwab Advisor Services, also charge custodial fees, and RIABiz has reported that in the past the fee was about $1,200 per quarter for RIAs who had less than $10 million in assets. Schwab spokesman Greg Gable says his company now negotiates fees on a case-by-case basis.
“I don’t have a set number to offer,” Gable says.
Pershing Advisor Solutions LLC also charges minimums — and generally discourages smaller advisors from bringing assets to its custody, says Thomas Valverde, managing director and head of business development and relationship management.
“We focus on professionally managed, growth-minded advisors, who serve clients with complex financial lives,” he says. “These advisors tend to have a minimum of $100 million under management, and therefore we don’t focus on advisors with less than $15 million as the other custodians do.” See: What headway Pershing’s RIA unit is making after four years under Mark Tibergien.
Valverde adds that there are a few advisors — about 5% of the firm’s 533 advisors — who have less than $25 million in assets. These advisors are charged fees of between $5,000 and $10,000 annually.
“We continue to focus on our optimal client and don’t see the fee as being an issue,” Valverde says.
Bring on the assets
But other custodians who don’t charge minimums are certainly hoping they’ll reap some new assets from Fidelity’s policy change.
For instance, Scotttrade Advisor Services does not have a custody fee for advisors.
“It is not uncommon for the business unit to see an uptick in inquiries anytime other custodians and/or broker-dealers make changes affecting their advisor base,” says Whitney Ellis, spokesman for Scotttrade Inc.
We’ll help you grow
Taking the opposite tack, TD Ameritrade executives express disgust with saddling small RIAs with big fees. Their philosophy is that a small advisor today could become a giant advisor tomorrow and they think that charging extra fees to smaller advisors could hinder growth. It’s a philosophy that has served TD well. See: Once good for a few million, TD Ameritrade’s foot-in-the-door strategy is starting to net billions.
Peter Dorsey, managing director of TD’s institutional sales, explains the firm’s philosophy:
“We just look at it differently than other firms like Fidelity. For us, it’s not about asset size. It’s about sustainability….When you put a metric or a dollar amount on it, it only tells one side of the story.”
But Dorsey does concede that his firm offers more services to larger advisory practices. See: TD Ameritrade wins a $2.5-billion RIA custody client on the strength of its delivery of B-to-B capabilities using Orion, Veo and API.
Serving the little guy
There are small, hungrier, custodians in the wings hoping to capitalize on big custodians’ fees. Dan Skiles, executive vice president of Shareholders Service Group Inc., says his firm has been winning advisors from all of the custodians because the smaller advisors often feel they’re not getting the same level of service at a larger custodian. SSGI doesn’t disclose assets but works with 1,100 RIAs. SSG has no criteria for assets, and no advisor minimums.
Another smaller custodian, Trust Company of America, also doesn’t have a minimum requirement for assets and could potentially gain some advisors from Fidelity’s move. See: How a small RIA custodian is making big waves.
“As long as we see an advisor with a solid background and good growth plan, we are willing to partner with them to help them grow,” says Josh Pace, senior vice president of business development for Trust Company of America.
“We are committed to help advisors reach their full potential. Within that sub-$15-million group of advisors, there are advisors with solid backgrounds and growth plans who are truly motivated to succeed using TCA’s technology to reach operational scale and efficiency. TCA is happy to partner with those advisors to help them grow.” See: A peek inside the rising RIA custodians fighting to overtake the Big Four.
For their part, Fidelity officials maintain the firm offers options for advisors with assets less than $15 million. Durbin says his firm encourages such advisors to use one of its other business models like joining an existing firm on the platform, partnering with an independent broker-dealer, or establishing a relationship with a turnkey asset management program or strategic acquirer.
Platforms at a premium
“Our platform fee allows us to continue investing aggressively in the resources that all of our clients expect and deserve. In addition, it will allow us to maintain our ability to offer competitive pricing for all of our clients,” Durbin says.
He points out that the custody unit continues to grow: Assets under administration have grown nearly 20% in the last year, from $567.6 billion as of August 2012 to $671.4 billion in August 2013, according to Durbin. Fidelity lumps third-party-administrator assets and trust bank assets in with RIA assets.
“We’ve had a tremendous year in terms of growth, increasing our assets under administration by nearly 20% in the past year,” Durbin says. “This is a testament to our clients’ strategically growing their businesses, as well as to the premium platform and service model we’ve put into place over the last several years.”
Mentioned in this article:
Top Executive: Kurt Cerulli
Scottrade Advisor Services
Top Executive: Brian Stimpfl
Pershing Advisor Solutions
Top Executive: Mark Tibergien
Top Executive: Tom Nally
The Financial Planning Exchange
Top Executive: Bryan Wisda
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