U.S. financial advisors may want to get familiar with relatively strict market regulations in the U.K. and Australia because similar rules may be coming here, according to Mark Tibergien, CEO of Advisor Solutions for BNY Mellon Pershing.
“Regulators learn from each other and talk to each other,” says Tibergien.
In the U.K., the RDR (Retail Distribution Review) bans commissions from product providers paid to advisors serving retail clients and requires advisors to disclose their charges to clients upfront. And MiFID II (Markets in Financial Instruments Directive) requires brokers to provide detailed reporting on trades including price and volume information, and banks and brokerages to break out (unbundle) costs for research and transactions while also limiting dark pool trades.
“The implication of these regs is that the “industry has to find a new way to make money,” says Tibergien.
In the U.S. most RIAs charge a fee as a percentage of a client’s assets, typically around 1%. In these cases, clients are essentially “paying for the value they bring to the relationship, not the value that the advisor brings,” says Tibergien. He likened the arrangement to a doctor charging a patient per pound of their weight.
Advisors “have to take a wider view of the relationships” they have with clients, says Tibergien. Many are “allocating investments, and outsourcing investment management to a fund company or ETF company or index. Someone else is managing the portfolio.”
This commoditization of investment management has led to fee compression for those advisors who only provide investment management, but not for those who take a more holistic approach dealing with a client’s life. The client views the fee of the investment-only advisor as a cost to be managed and the fee of the more comprehensive advisor as a value that delivers a return, says Tibergien.
He says there will likely be more pressure on RIAs that charge fee on AUM and potentially more disclosure required about fees.
“In the U.K. they have to clear … what your client is going to pay. I can imagine that becoming a force in the U.S.”
Tibergien says he’s already seeing changes in the fee structures of RIAs, with roughly 30% of RIAs charging retainer or project fee in addition to asset management fees.
Geoff Towers, CEO of Pershing’s European business, explains that in the U.K. advisors and other financial professionals have to disclose the actual costs in terms of the local currency and not just as a percentage of assets.
The more successful advisory firms have turned those disclosures to their advantage, says Towers. Individual advisors explain their value proposition to clients, which can help solidify the relationship, and advisory firms more clearly define their mission, “stratifying their value chain into the bits that they will own and the bits that are just commodities and can outsource.”
— Check out What Will Become of Us? on ThinkAdvisor.