Fee-Based Wrap Programs
may not be a very sexy title, but you'd never know it from the scene at the Roosevelt Hotel in New York. At the IIR conference on wraps on February 7, speaker after speaker extolled the glory of fees, rather than commissions and wrap programs -- combining advice and brokerage services.
presented early in the day, and set the tone for most of the speakers to come. Roame is the head of Tiburon Strategic Advisors
, a market research and consulting firm in California. He sees fee and commissions as directly antagonistic, and says that "the war between them is over." Fee-based services are triumphant, and those still charging commissions just don't realize it yet.
For Roames, statistics told the story:
-- Banks and brokerages (i.e., commission chargers) still control 75% of invested assets, but independent advisors and discount brokers (fee chargers) are easily the fastest growing entities.
-- Wrap accounts are capturing an increasing piece of the investment pie. This is particularly true of mutual fund wrap accounts, which have an annual growth rate of 60%, compared to 12% for full service brokers and 5% for banks.
-- A number of full service brokers, including Merrill Lynch
and Solomon Smith Barney
, now offer the option of fee-based accounts.
-- Consumer satisfaction with fee-based advisors is extremely high.
So if fee-based programs will be the forest of the future, what will the trees look like? Roames fearlessly made a number of predictions about the coming marketplace.
First, while Roames believes that the war between fees and commissions is over, he acknowledges that there are many turf battles yet to be fought. He isn't predicting the winners, but he speaks very highly of Merrill Lynch's Unlimited Advantage
Second, he sees greatly increased price pressure. Within two years, he predicts, a wrap account will be offered for a flat annual fee, not as a percent of assets being managed. Soon after, somebody, somewhere, will offer a free account, with revenue being supplied by fund companies or other sources. Roames admitted that this scenario was likely to strike fear in the hearts of the audience.
Third, consumer choice will be paramount. Investors want choices about the channels by which they can access their accounts (internet, phone and personal). Services will be bundled and unbundled. The bundling will bring many options into the fold (or wrap), including wealth management and sophisticated offerings like hedge funds.
The unbundling will occur when investors can opt out of certain services normally wrapped, like rebalancing, reallocation and performance reporting, with a commensurate reduction in fees. The ultimate result will be a "menu" of account options, with assets and services priced individually.
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