Morgan Stanley just put a big threat on the table, and they are not alone. The bank says that it may withdraw wealth management services entirely from states considering new fiduciary rules, such as Nevada. Wells Fargo issued a similar threat. A number of states, including Nevada, New York, New Jersey, and Maryland, are considering making their own fiduciary rules. Such rules would be a major headache to the brokerage industry as they would create patchwork rules across the country. Morgan Stanley said bluntly “Absent substantial changes to the [state] proposal, Morgan Stanley will be unable to provide brokerage services to residents of the state of Nevada”. Edward Jones, TDA, and Charles Schwab also said they would need to at least pair back offerings.
FINSUM: This is a strong move by the brokerage industry but we do not think it will work. The political mood in the states mean lawmakers would rather say “good riddance” than back off, but time will tell.
“Cross-selling” has been the name of the game at Bank of America Merrill Lynch for years, but Merrill is about to take the idea to new heights. Partnering with BofA, the Thundering Herd is now offering mortgage discounts of up to half a percentage point to clients if they bring more of their business to the brokerage or the bank. According to Barron’s “Merrill is testing the rate reductions in California, Oregon, Washington, New York, New Jersey, Connecticut and Florida. The 50-basis-point reduction is available to clients with $500,000 in deposits or investments to qualify for the half a percent mortgage reduction.”
FINSUM: This could be a considerable competitive advantage for luring clients away from other brokerages. We expect Wells Fargo will follow suit, but it will be harder for Morgan Stanley and UBS to do so.
If you are thinking of selling your brokerage, you are in for bad news. Right now, brokerage firms are getting between 0.7x to 1x the past year’s revenues as a purchase price, while advisory firms are getting from 1.5x to 2.5x. The explanation for the very weak valuations is that brokerages don’t have any fiduciary rule experience, which greatly lowers their value versus advisory firms, which have acted as fiduciaries all along. Additionally, commissioned-based revenues, which are the norm for brokerages, are considered less “sticky”.
FINSUM: It is a terrible time to be trying to sell a brokerage. On top of all the factors mentioned, the other major one pulling down valuations is uncertainty. Wealth management is currently fraught with unknowns surrounding technology and regulation, which is also hurting prices.
The fate of the fiduciary rule is unclear, but some things are not: that big firms are making loads of money on conflict-free advice. For instance, Bank of America Merrill Lynch saw a big jump of $29.2 bn in fee-based client assets in the first quarter. JP Morgan saw $8 bn of inflows, including those with a recurring fee. The piece argues firms had already begun the switch well-before the rule was released, and that the new rule just helped them cement the changes. Fee-based accounts are great for firms as they can get as much as 50% more revenue out of an account than with a commission-based model, says Morningstar. Merrill Lynch is already seeing gains from its fee-based model, with revenue up 3% in the first quarter.
FINSUM: This article highlights the inherent flaw of the fiduciary rule and the measure is not even finalized yet. What good is a conflict-preventing rule if it ends up raising costs for so many retirees?
Source: Wall Street Journal
One of the world’s largest wealth management units is unilaterally shunning the fiduciary rule. UBS thinks that the rule is likely to be nullified, leaving the brokerage landscape unchanged. “There is some indication that [the rule] will, at a minimum, be delayed, and then potentially, not implemented at all”, said the bank’s CFO. The comments join those from Raymond James, which also spoke out last week saying they think the rule is doomed.
FINSUM: This is a big indication in our opinion. Senator Warren sent a letter questioning major firms on their views on the rule and they are now answering publicly.
Source: Wall Street Journal