Assets Under Management

Brokers Once Disdained Independent Advisers. Now They Copy Them.

The Wall Street Journal by Michael Wursthorn, Originally published January 6, 2017

Wall Street brokerages are moving to comply with new retirement-advice regulations, boost profit and take back market share.

Executives at Wall Street’s biggest brokerages for years have dismissed independent financial advisers as unsophisticated rivals who worked out of strip malls.

These registered investment advisers acted as fiduciaries required to put clients’ best interests ahead of their own, collected fees instead of commissions and didn’t receive compensation to promote one product over another.

Brokers, meanwhile, were traditionally tasked with pushing stocks and bonds on investors for a commission and held to the looser standard of having only to ensure recommendations were suitable.

The distinction is blurring as Bank of America Corp.’s Merrill Lynch, J.P. Morgan Chase & Co. and other firms with brokerage outfits are moving to comply with new retirement-advice regulations, boost profit and take back market share by dropping commissions in retirement accounts in favor of fee-based advice. The moves, hastened by a new retirement regulation known as the fiduciary rule, are the latest in an industry shift since the financial crisis that has taken brokers from peddling stocks to providing advice for a fee.

For independent advisers, some of their key selling points are being co-opted.

“In the 1990s, it was easy to compete and differentiate against the big brokerages because they were focused on transactions and we only collected fees,” said Christopher Cordaro, chief executive of RegentAtlantic LLC, a fee-only adviser in Morristown, N.J. “Over time, their marketing materials looked more and more like what we tell our clients.”

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The industry’s transformation comes as the U.S.’s biggest brokerages try to shrug off their lingering boiler-room images and sales-driven cultures, which have contributed to their loss of market share to their independent peers the past several years, experts say. Traditional brokerages’ share of the advice market has shrunk from 63% of assets in 2010 to 59% in 2015, while independent advisers have grown from 37% to nearly 41%, according to researcher Cerulli Associates.

By 2020, Cerulli estimates, traditional brokerages will advise on less than 48% of the market’s assets, while independent advisers will oversee more than 52%. Much of that growth comes from brokers who defect from firms like Merrill to launch their own practices.

“Consumers are starting to recognize this idea of conflicts of interest,” said Bing Waldert, a director with Cerulli Associates. “It’s contributed to the growth of the [independent adviser] channel and to the growth of firms like Vanguard [Group].”

In response to the new rule, Merrill Lynch, one of the biggest wealth-management firms with $2 trillion in client assets, was the first last year to say it would abandon the industry’s traditional sales model of charging investors for each transaction made in a retirement account, instead offering to work with retirement savers for a fee based on a percentage of a portfolio’s assets.

Soon after, Merrill Lynch launched a national advertising campaign promoting the decision as a shift from the status quo. It was one of the firm’s biggest advertising pushes directly to consumers since its acquisition by Bank of America in 2009, according to a spokeswoman.

“It’s going to help raise the level of trust in our industry. Because clients are going to be assured that when it comes to their retirement savings, there’s no one’s interest that is being put in front of the interest of a client,” said Andy Sieg, who took over as head of Merrill Lynch this month, in one ad.

For Merrill, the direct plea to investors may help stem year-over-year revenue declines that plagued the brokerage in 2015 and 2016.

A number of firms chose not to follow Merrill’s lead and will continue to offer commission-based IRAs under the rule, including the brokerages of Morgan Stanley and Wells Fargo & Co. Still, each of those firms has been pushing their brokers to work with more clients for a fee rather than commissions.

Independent advisers need to “up their game” to explain the finer differences between the two segments of the wealth-management industry, said RegentAtlantic’s Mr. Cordaro. RegentAtlantic clients who need a loan, for instance, can compare offers from various banks to get the best terms, while Merrill brokers are restricted to offering only Bank of America’s debt products, he said.

Merrill’s spokeswoman says the firm has a process to ensure rates around debt products are competitive market to market and additional discounts may be offered.

Steven Wagner, a former Merrill broker and co-founder of Omnia Family Wealth, an Aventura, Fla.-based investment adviser, is selling clients on what he calls his firm’s nimbleness and how it isn’t encumbered by the need to cross-sell banking products such as at Merrill, which recently mandated that brokers had to make at least two referrals to other business units in 2017 to avoid a hit in pay.

Reston, Va.-based investment advisory firm PagnatoKarp, which oversees $2.5 billion for clients, built out a family office to offer clients services such as managing their taxes, handling travel arrangements and even footing legal tabs on estate plans.

But the biggest differentiator firm founder Paul Pagnato says independent advisers should cling to: Merrill’s decision to still accept commissions on nonretirement accounts.

“You can’t be a true fiduciary if you charge commissions,” said Mr. Pagnato, another Merrill alum. “There are still major differences between someone who is a true fiduciary over the entire relationship of the client versus someone who takes that step on retirement accounts.”