BAC Bank of America Corporation

By Michael Wursthorn 

An Obama-era retirement-savings rule is in limbo, but investors already are pouring their retirement savings into brokerages' promise of conflict-free financial advice in exchange for a fee.

Bank of America Corp.'s global wealth unit, which includes the "thundering herd" brokerage force of Merrill Lynch, gained a record $29.2 billion in new fee-based assets in the first quarter, the bank said Tuesday. J.P. Morgan Chase & Co. said last week that $8 billion of new assets flowed into long-term products, including those that charge a recurring fee.

Also on Tuesday, private-equity firms Stone Point Capital LLC and KKR & Co. agreed to spend $2 billion for a majority stake in Focus Financial Partners, a New York-based investment firm that backs independent financial advisers who charge fees and pledge to minimize conflicts.

The developments are the latest sign that advice for a recurring fee is Wall Street's go-to compensation model for the future, as firms like Merrill and J.P. Morgan use the fiduciary rule as a way to phase out commissions as a payment option in retirement accounts. The industry shift is coming even as the Trump administration seeks to eliminate or revise the rule.

"They were already in this mode" of shifting toward fees, said Denise Valentine, a senior analyst on wealth management at Aite Group. "The rule just allowed them to put this into the marketplace and make a commitment."

Even before the fiduciary rule, brokerages had been trying to abandon their sales-driven cultures to position their broker forces more like independent financial advisers who create financial plans and offer advice. Besides positioning themselves to better compete with the rise of smaller, independent rivals and investors' growing preference for passive investments, brokerage executives found that fees for advice and services could be more lucrative over the longer term compared with commissions.

Researcher Morningstar Inc. says fee-based accounts can yield as much as 50% more revenue than commission accounts.

The shift to fees from commissions has picked up as firms sought to comply with the Labor Department's fiduciary rule. Besides the wider margin on such accounts, fees also minimize potential conflicts tied to the sale of specific investment products and cut down on some of the litigation risk brought on by the rule, observers said. However, such accounts can also lead to higher fees for investors who trade little.

Bank of America has been at the fore of the charge. It set a course that sought to mostly do away with commissions in retirement accounts in favor of recurring fees and has been heavily advertising its shift. Merrill, for its part, decided that clients who wanted retirement advice from one of its brokers would have to pay a fee to avoid the rule's more onerous requirements and heightened legal risk. It also says fee-based accounts are better suited to minimize risks.

That shift to fees is already boosting its bottom line. Higher revenue tied to fee-based assets helped push Merrill's revenue up 3% from last year to $3.8 billion in the first quarter and offset declines in traditional commission revenue, the bank said. Of Bank of America's $2.6 trillion in total wealth assets, about $946.8 billion are in longer-term investment strategies, including those that charge a fee.

"These solid results were produced in a period of change for the industry as firms and clients anticipate new fiduciary standards and other market dynamics, such as the shift between active and passive investing," Bank of America's finance chief, Paul Donofrio, said on a conference call Tuesday.

Even after the Labor Department said earlier this month that it would delay the rule's April 10 implementation by 60 days to conduct a review of its economic impact, Merrill executives told brokers to push forward. J.P. Morgan said it would continue with its plan to steer its commission-paying clients to accounts that charge a fee or a self-directed option but would push back its deadlines for clients to convert to coincide with the rule's new timeline.

Rivals such as Morgan Stanley and Wells Fargo & Co. have said they would continue to allow retirement savers to pay commissions in retirement accounts, although they would likely face some sales restrictions. Still, those banks have continued to report gains in fee-based assets in recent years.

Bank of America's first-quarter fee-based inflows were a record high for the wealth unit, which includes Merrill and private bank U.S. Trust, beating the previous mark of $20.4 billion set in the first quarter of 2013. The bank said the inflows were driven by "strong" client activity and the movement of assets from individual retirement accounts that pay commissions into fee-based accounts.

The industry's transformation comes as the U.S.'s biggest brokerages attempt to stop losing market share to independent financial advisers much like the ones who work with Focus Financial. Traditional brokerages' share of the advice market has shrunk from 63% of assets in 2010 to 59% in 2015, while independent advisers have grown from 37% to nearly 41%, according to researcher Cerulli Associates.

By 2020, Cerulli estimates, traditional brokerages will advise on less than 48% of the market's assets, while independent advisers will oversee more than 52%. Much of that growth comes from brokers who defect from firms like Merrill to launch their own practices.

Even as brokerages like Merrill attempt to act more like the independent firms they once looked down on, Focus Financial expects to rely on the deep pockets of Stone Point and KKR to expand its roster of independent wealth managers beyond the 46 that currently work with it.

"This deal is a reflection of the tremendous success of our industry, the [investment adviser] model and fiduciaries," said Rudy Adolf, Focus's chief executive and founder. "There's a lot of money in motion in this industry."

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

April 18, 2017 19:17 ET (23:17 GMT)

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