Chip Roame, managing principal at Tiburon, clarified these findings saying, "There are two points here:
1. Some firms may create fee-account programs whereby the client is charged a CDSC for exiting early. These will be especially valuable to protect the economics of the advisor who invests his/her time substantially upfront and then may see a client exit after six months, having only earned half of one year's fee (maybe as little as 50 basis points).
2. A distinctly different approach-some firms may offer to pay advisors a commission-like upfront sum for the sale of fee-accounts while still collecting traditional fees from the client. In other words, the firm would subsidize the advisor upfront and collect later from the client. This would. be especially useful to the advisors used to the 4% to 5% upfront commissions."
Retainer Models: This model may work better for clients whose needs are more far-reaching than simply investment strategies. Fees on assets could be at least partially displaced by retainers in this instance. The aging baby boomer population could create this next sea change. Some in our industry have argued that some asset-based fees are now causing, or have the potential to cause, conflicts of interest. As an example, diversifying into real estate or making a larger-than-needed home downpayment might be discouraged by an advisor collecting an asset based fee. The client's best interests would not be served in this case. Tiburon suggests that the more affluent client would likely benefit by the retainer fees, and that firms using this model would draw more members of this audience as a result.
Unbundled Offers: Even though the much-debated concept of process vs. product continues to rage on, the industry at large has accepted the consulting process as valuable for small, mid and large investors. The products are the interchangeable vehicles, and methods of delivery. Tiburon suggests that client profiling, asset allocation and the investment selection should remain bundled; however, the re-allocation of assets, quarterly reporting, monitoring of the manager(s) and continuing client service that the industry assumes as part of the "wrap" services could be unbundled for separate pricing. Separating the money management, custody, and clearing fees also may make sense. These costs, plus the administration fees, are all grouped in the proprietary programs; while many firms already unbundle on a case-by-case basis. Tiburon says unbundling the trading costs might be good for those who are subsidizing others.
According to Roame, unbundling trading costs would benefit clients who chose low turnover managers. Says Roame, "Some managers have very high turnover [many trades]. As a result, pricing schedules must take this into account, and hence, clients using low turnover managers are paying more than they should. Unbundling trading costs would allow these clients to pay less."
Is The Wealth Management Account Around The Corner?
Since wealth management is gaining in significance for investors, it is likely that firms could soon introduce a wealth management account that bundles fees for certain services. For example, tax, insurance and estate planning would be included in one account along with investment management. According to Tiburon, many of the report participants liked the concept, and one firm, Legg Mason, currently is executing a similar program.
Again, the goal would be to include all investors in the consulting process. For example, if the process was wrapped around various investment vehicles, clients would benefit both on the fee side and on the services side. For smaller clients, mutual funds, exchange traded funds and annuities could be the core products; mid-sized clients would receive institutional funds and MDA-type vehicles. The affluent client may require separate accounts and alternative investments such as hedge funds; the ultra-high-net-worth individual may seek institutional investing consulting, insurance packaging, and wealth management services.
Customizable MDAs and Other Investment Vehicle Innovations
The MDA-type accounts (pioneered by Citigroup in 1997) should gain considerable momentum over the next few years, according to the Tiburon report. They also may be customizable. Currently, convenient off-the-rack asset allocations are offered, but with new entrants the industry may see the overlay process pulled in-house. The goal is to create completely customized portfolios.
So far, the major MDA-type account successes are proprietary products in proprietary channels (such as Merrill and Smith Barney), but the dynamic models will be the product design of choice and could emerge as soon as this year.