When Management Pushes Managed Accounts
Reposted with permission from RegisteredRep.com's Advisorland, January 1, 2008
Q: I work for a major firm, which constantly pressures us to move our clients' assets into managed wrap accounts. We're being sent subtle, — and not-so-subtle — reminders about why these programs are in our clients' best interest. My manager regularly says large positions in one stock are best liquidated and invested in the firm's managed money program over the long-term. I hate this approach; it's expensive. The performance is nothing great, and I lose a little bit of control over the client relationship. Is this pressure the same at all the majors? How do I avoid this approach without getting myself fired?
A: There's no question the street was revolutionized by the asset manager/fee-in-lieu business model as an alternative to one driven by transactions and commissions.
The rationale behind this new model makes superficial sense. First, the fee-based model annuitizes revenue for the firm and broker, and makes it less susceptible to the markets — more predictable and less dependent on turnover. Second, in theory, it eviscerates incentives for churning (i.e. trading excessively), arguably removing churning as a weapon for plaintiffs' lawyers. And third, at a time when financial products are getting more complex, it's unrealistic to expect a broker to become equally conversant with all segments of the market. By putting the rep in charge of gathering assets, which are then turned over to third-party managers with specialized expertise, a higher level of professionalism (at least in theory) may be achieved.
The fee-in-lieu model has been adopted by virtually all wirehouses, and is now part of a larger strategy to control all the customers' financial affairs from womb to tomb, wedding him or her inextricably to the firm through financial relationships. From the firm's perspective, if it manages the customer's banking, brokerage and insurance needs through fee-based relationships, it becomes more difficult and less advantageous for the customer to sever the relationship with the institution. In essence, he or she becomes the firm's customer, not the broker's. That way, if the broker were to leave the business or join the competition, the firm has a better chance to retain the business for itself.
To specifically address your question, I haven't heard of any firms doing a universal housecleaning of the “dinosaurs,” i.e. those resistant to the new business model. Instead firms are encouraging fee-business in more subtle ways: through reduced-commission payouts or higher charges, and other costs for transactionally-driven advisors and clients. The bottom line is that you should anticipate a continued effort to promote the asset gathering/fee-in-lieu model.
But the lemming-like rush to certain products, such as managed accounts, does not come without risk to the firm or the broker. Alleged instances of “reverse churning” — getting buy-and-hold customers to opt for a managed account on a fee-basis, even though they rarely (if ever) turn over the portfolio, when a commission account would likely be cheaper for this client — are growing. Regulators have opined there's no compelling reason to put buy-and-hold clients into a fee-based program, and firms have been cited for this practice.
Try to walk the line between your style and the firm's. If the customer's needs and interests are being served while creating respectable revenue for you and the firm, you're doing your job well. Not every customer is suitable for a wrap account — or even interested in establishing one. If the situation at your shop becomes intolerable, you may have to find a firm more accommodative of your business mix and practices. They do exist, although they're becoming ever rarer, especially among the wirehouses and bank-owned firms.
Fads and business practices come and go. Maybe the wrap account is a better idea; maybe it's not. Time will tell. The firm is trying to position itself to retain the business, even if you are not there to serve it.
Jonathan M. Harris
Lindquist & Vennum P.L.L.P.
Minneapolis, Minn.
(612) 371-2492
jharris@lindquist.com
