Thanks to Mason Braswell for taking his time to write a useful piece of article on brokers in investmentnews.com.
LPL adviser Sharon Joseph of Joseph Financial Partners knows she could make more money if she moved her clients onto a fee-based platform with a recurring annual charge of around 1%, but after three decades in the industry, she said that the math doesn’t add up for her clients.
She said that for her approximately 700 clients, all of whom have assets below $2 million, a commission-based model works best.
“I am not afraid of much, and certainly not afraid of the way my pay would change if I moved to fee-based,” Ms. Joseph said. “I stay commission-based because it is the right thing for my clients.”
That puts Ms. Joseph, whose firm manages around $163 million in assets, in the minority of advisers. For more than a decade, firms such as LPL Financial have been encouraging advisers to go fee-based, meaning that they derive a majority of their business from charging clients around 1% to 2% of assets under management annually. Around 57% of all advisers are fee-based, according to the most recent Cerulli Associates data from 2013.
Meanwhile, broker-dealers continue to push for more fee-based business. Morgan Stanley Wealth Management, which reported it had around $724 billion — or 37% — of assets under management in fee-based accounts as of the end of March, has said that number could rise to around $1 trillion if growth continues at a similar pace.
Firms market fee-based accounts as more transparent and having less conflicts of interest than charging on each transaction, but in reality there is a lot of gray area around what makes sense for the client, said Brian Hamburger, president and chief executive of MarketCounsel, a legal and regulatory consulting firm focused on registered investment advisers.
“We have a tendency to look at this as black and white as commissions are wonderful, or commissions are evil; fees are wonderful, or fees are evil,” he said. “But when you peel back, you start to see the reasons they look at it differently is because clients have different needs.”
CRUNCHING THE NUMBERS
From an expense standpoint, it might be hard to justify a fee-based relationship on a smaller portfolio, such as those Ms. Joseph manages, or on a long-term retirement investment that does not require frequent changes.
The compounding effect of a 1% annual wrap fee on a $1 million retirement account over 20 years is more damaging than an upfront commission and a quarterly 12b-1 marketing, or “revenue sharing,” fee that usually runs around 25 basis points, or .025% of assets, Ms. Joseph argued.
She said she put one of her wealthiest clients who sold a small business for around $2 million into a well-known fund family with a low expense ratio that will allow her to shuffle assets around different funds in the family free of charge.
“Except for capital gains tax, they’ll have no other sales charge for the rest of their life,” she said.
If she had charged a fee on those assets as well, it would have taken out another 1% to 2% of their annual return in addition to the fund’s annual operating expenses.
Overall, around 49% of Joseph Financial Partners’ assets are in mutual funds; 38% is in insurance and annuities and another 13% is in brokerage.
Still, the math can be complicated and depends on what is being offered, said Ned Van Riper, a former financial adviser who now counsels advisers going independent through his firm, Finetooth Consulting.