Fidelity will soon charge a big fee to small advisors

Brooke’s Note: What I wrote about TD Ameritrade the other day in relation to its innovative UMA program is also true with regard to Fidelity: Neither company is content any longer to merely follow Schwab. Fidelity showed yesterday that it continues to making bold moves with its technology. Today’s article shows it is also willing to take a risk with how it charges RIAs for services. Typically only market leaders dare to pioneer price increases. Fidelity’s new $10,000 annual fee on micro-RIAs won’t be popular with those affected but it may be the right move for its business.

The smallest RIAs on the Fidelity Institutional Wealth Services platform will soon have to pay a much larger custody fee.

Registered investment advisors who keep fewer than $10 million of assets parked with the Boston-based RIA custodian will need to pay a quarterly fee of $2,500, starting with a bill on Dec. 31.

This represents a doubling of the current $1,250 fee it charges these micro advisors and it may be the largest such fee in the industry; Schwab charges advisors of this size $1,200.

Industry ramifications

Fidelity’s move is having ramifications in the industry, with custodians including Scottrade, Trade-PMR and Shareholders Service Group that don’t charge a fee saying they already see signs of an uptick in business. TD Ameritrade has traditionally been a haven for emerging advisors and it will continue to capitalize on the market without imposing any fees, according to a spokeswoman.

Fidelity, which notified advisors about the change a couple of months ago, is working on upgrading its service across all of its advisors – an effort that is requiring an investment in more people, according to Mike Durbin, president of Fidelity Institutional. The timing of the fee increase is tied to this service effort. See: Goldman aims to make red carpet service for RIAs universal at Fidelity Investments.

Formerly Fidelity made heavier use of call centers, but now every client has a Fidelity relationship manager in addition to a dedicated service team. See: Fidelity names buck-stops-here service czar for all of its financial advisory channels.

The fee increase is not popular with the advisors, Durbin allows.

Negative reaction

“We’re very comfortable with the move but as you might imagine, advisors have reacted negatively. They can intellectually understand what we’re trying to do. It’s an increase and they are small businesses so any increase [hurts].”

Other Fidelity RIAs say they have been recently subjected to other changes. Advisors with less than $30 million of AUM can no longer park alternative assets with Fidelity, confirms Steve Austin, spokesman for Fidelity.

“Fidelity continues to support alternative investments for many of our clients, as we have for years. Clients with less than $30 million in total assets under management need to choose a new custody solution for any alternative investments on our platform.”

And these less-than-$30 million RIAs have less discretion. They can no longer direct funds between accounts without the move getting signed off on by clients.

“As an industry leader, we regularly evaluate the business environment and make adjustments to our offering as needed,” Austin says.

Alternative investments

Catherine M. Paulo, president of Staten Island-based Paulo Financial Advisors, which has $18 million AUM, says the latter two changes didn’t bother her much. She had only one client with alternative assets and clients are perfectly willing to sign a standing order to direct funds.

But, she said such a large custody fee would be bound to hurt an advisor who is just starting out.

“That’s a good chunk of change for a small advisor,” she said. “Fidelity took me when I had no assets.”

Fidelity’s move is bold, but may also be necessary, according to Philip Palaveev, Seattle-based president of Fusion Advisor Network.

Push comes to shove

“It seems like push is coming to shove and everybody has to look at their business and make the right decision,” he says. “You’re likely to see a variety of such moves across the industry. Advisors are doing the same thing with their bottom of the list of clients – establishing a [set minimum] fee rather than firing them.” See:What Meg Green was thinking when she purposefully shed $40 million of assets

Some custodians, like RBC Advisor Services and Raymond James, have no custody fee [see note from Mike DiGirolamo of Raymond James in the comments section below clarifying his company’s position] for low balances but have established a minimum of $50 million of AUM. See: Raymond James shows it’s serious about winning bigger RIAs.

The need for such changes is being prompted in the custodial business by adverse economics. Low interest rates on money market funds have killed the spreads that created the profits, Palaveev adds.

This shift to smaller custodians by some clients is a positive development in some respects, Palaveev says. “Somebody is going to say: These are my people and I can make a business model that fits these people.”

TD Ameritrade does not plan to implement a low-balance fee and Schwab Advisor Services has no plans to increase its $1,200-fee, according to spokespeople at the firms.

“Our scale allows us to successfully serve the emerging advisor market while maintaining profitability,” says Kristen Petrick, spokeswoman for TD Ameritrade Institutional. “We are able to deliver the tools and service they need to grow their business.”

Jon Beatty, head of sales and relationship management for Schwab, explains why his company has no plans to raise its $1,200-fee: “Smaller advisor firms are very important clients for us. We have specialized, dedicated teams to serve them, and more than 90% of small firms consistently rate our service to be very good or excellent.”

Source of business

The Fidelity changes for the under-$10 million crowd are likely to be a welcome source of new business for up-and-coming custodians, including Scottrade, Trade-PMR and Shareholders Service Group.

“We see an uptick in new business inquiries as well as new business being moved to Scottrade” as a result of Fidelity’s announced fee increase, says Carrie Trent, spokeswoman for St. Louis, Mo.-based Scottrade Advisor Services. Scottrade, which serves 750 RIAs, has no minimum asset levels and charges no fee for low balances.

Peter Mangan, principal of La Jolla, Calif.-based Shareholders Service Group, says that his company is also hearing about Fidelity’s change from prospects.

“I can tell you we have brought in clients from Fidelity. I can’t tell you if that’s the reason,” he says.

Frederick Van Den Abbeel, executive vice president/RIA service for Gainesville, Fla.-based Trade-PMR says that the imminent fee increase has also been noticed by recruiters at his company.

“It has affected us in a very positive way,” he says. It has resulted not only in Fidelity RIAs looking at Trade-PMR but in referrals from Fidelity RIAs, Van Den Abbeel adds.

Zero trades?

The prospects have expressed concerns and frustrations about whether the fee is a harbinger of more increases to come. One active trader told Van Den Abeel: I trade rather frequently – AUM alone doesn’t bring revenue; so if I deposited $20 million and did zero trades – is that what they prefer?

Final note: Palaveev points out how this is just the free market sorting itself out. The one potential downside of the fees is that a certain number of reps looking to leave broker-dealers to become RIAs will decide to stay in the IBD world where such fees are unheard of.