Data & Research June 2, 2008

The Road Ahead for Broker/Dealers

Broker/dealers are projected to double in size over the next five years and must refine and improve their operations in order to continue success.
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The Broker-Dealer of the Future report from Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation, released today with InvestmentNews and CAST Management, examines the outlook for broker/dealers in order to identify opportunities and challenges.

Tech Smart

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The study addresses the evolving technological demand from the broker/dealer. Practice management could bridge the gap between the expectations of investors and the products of a typical broker/dealer, according to a press release about the study.

Broker/dealers will need to provide investment professionals with innovative technology and strategies, and continue to evaluate processes to improve efficiency, Pershing says.

“Investment professionals will need to increase their productivity in order for broker/dealer firms to optimize their growth and profitability,’ said George Braunegg, founding principal and executive vice president at CAST Management Consultants, Inc, in the release. “Achieving higher productivity will come through various means including innovative solutions using new and existing products, training, practice management support and focused deployment of technology. Determining which of these methods to focus on and rationalizing which organizations to partner with to achieve this goal will be essential for best-in-class broker/dealers of the future.”

Adviser Shortage

Although broker/dealers are expected to grow, they are coming up against a shortage of investment professionals.

As the average investment professional is approaching their mid-50s, broker/dealers should concentrate on succession planning in order to transition client relationships and retain the assets in the organization, Pershing says (see Firms Increase Recruiting Efforts for New Advisers).

Adviser Revenue

The world of the broker/dealer and registered investment advisers (RIA) are no longer distinct.

Advisory fees are the number one source of revenue for broker/dealers, and this is expected to grow. The study predicts that in five years, the proportion of revenue represented by fees might exceed 50% of a broker/dealer’s total revenue.

With this information in mind, broker/dealers have to continue to develop strategies to keep dually registered firms on their platform, the study suggests.

“The broker/dealer industry is entering a period of great opportunity, a time when financial advice will be needed more than ever before,’ said Jim Crowley, managing director at Pershing LLC, said. “The broker/dealer of the future will be a financial organization that is well differentiated from the competition and capable of attracting and retaining talented investment professionals. Broker/dealers must close the gaps between their current value proposition and the needs of their investment professionals and investors in order to achieve continued growth and success over the long-term.”

Data & Research June 2, 2008

Investors Don’t Bite the Hand that Fees Them

A majority of affluent investors, especially those that work with an adviser, do not think their fees are too high, a study from Spectrem Group found.
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However, many with mutual fund wrap accounts are not even aware of the fees they are paying.

Perception and Understanding of Fees surveyed 501 affluent investors (more than $500,000 in investable assets) in order to capture their sentiment about fees. The study concludes that advisers should present fees as clearly as possible and be prepared to discuss fees in detail with investors, who are all interested—particularly the younger and wealthier clients.

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Overall, most investors surveyed did not think fees charged for investment services were too high. The breakdown of that sentiment is as follows: 27% “strongly disagree’ that fees are too high, 20% “disagree,’ and 22% are “neutral.’

Investors with an adviser were less likely than those without an adviser to think their fees are too high (10% verse 19%). The portion of investors surveyed who have a primary financial adviser of some sort totaled 68%.

Fees First

Sixty-six percent of investors surveyed thought fees were important, and this number was even stronger in the under 55 crowd (71%). Additionally, affluent investors with assets of $1 million or more place a greater level of importance on fees than do those with fewer assets.

Fees are not necessarily less important than returns to investors: Only half of those surveyed “strongly disagree’ that fees are more important than returns, the report says. Spectrem suggests this is because investors are willing to accept higher than average fees if the performance of the underlying investments warrants the price.

Fees do not seem to be a basis for comparison shopping, Spectrem says. Interestingly, investors without an adviser are more likely to comparison shop than those with an adviser (29% verse 18%).

Mutual Understanding

Only 28% of those surveyed invest in a mutual fund wrap accounts, although most of the investors surveyed own mutual funds (78%).

Almost half (46%) of investors don’t know the percentage they are paying for their mutual fund wrap account, and 32% are paying between 1% and 1.99%

As far as regular mutual fund fees, more than half of the mutual fund owners claimed to be familiar with different share classes and 81% claimed to understand investment management fees, the report says.

The report can be ordered from www.spectrem.com.

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