The implementation of the DOL rule is likely to accelerate Signator Investors’ fee revenue from the current level of 60% to 90% by 2018, according to Brian Heapps, CEO and president of the Manulife-John Hancock brokerage subsidiary.
If that target is reached, it will represent a complete reversal from the 10% of revenues that Signator derived from fees in 2007. That was the year Heapps left Keystone Financial Management, a financial planning and wealth management firm in Allentown, Pa., to join the executive ranks of its broker-dealer, a Hancock unit that was renamed Signator.
More than ever, Heapps thinks advisors affiliated with independent broker-dealers are going to need to embrace technology to achieve the scale required to thrive in the next decade. He also believes that as the environment shifts away from one in which advisors’ compensation is product-related, more clients are going to be willing to pay for fees for pure financial planning and other services that were once wrapped into a product sale or AUM fee.
At Signator, which generates almost $500 million in revenues from 2,200 reps, the DOL rule is driving the reps in one of several directions. Many will rely on exchange-traded funds and the institutional share classes of mutual funds.
Heapps notes there are many options for advisors who want to focus on financial planning and are not that interested in managing money or devoting a great deal of energy to selecting money managers. These include platforms from the likes of Vanguard, Morningstar and Envestnet, with which Signator recently inked an agreement.
Finally, some advisors will continue to actively manage clients’ money. But Heapps believes firms that want to do this in a highly competitive environment need to realize how serious an undertaking it is. A California firm affiliated with Signator manages more than $4 billion in assets, but it employs a number of CFA charter holders who have worked in major financial institutions.
When it comes to guaranteed income, Heapps expects that some clients will continue to want annuities. Insurers are reacting to the DOL rule by restructuring the vehicles they offer. It is also a sign of the times that Signator’s parent, Manulife-John Hancock, exited the annuity business several years ago, as did many insurers, reasoning the risks outweigh the upside.
“Everyone [insurers still in the annuity business] wants to have a product that is DOL-compliant,” Heapps says. “What we are seeing is product manufacturers changing compensation structures to more of a level-fee [payout grid].”
Investment products with high fees of 6% or more are likely to become scarce. That is particularly true in the illiquid, non-traded REIT arena, where Signator has derived less than 1% of its revenues. Heapps acknowledges retirees are seeking two conflicting objectives, income and capital preservation, but his firm feels much more comfortable using liquid alternative investments rather than illiquid counterparts.
Furthermore, there are some investment strategies like laddered bond portfolios where commissions make sense and are far less expensive to clients. “If someone were to charge a fee on [an unmanaged] portfolio of laddered bonds, it should be at a significant discount,” Heapps says.