Looking at industry research, the average advisor’s business is projected to be about two-thirds fee based versus about one-third commissions. My guess is that the average reader of this blog tilts a bit higher to the fee side, especially with new business, but many still have some old 12(b)1 business on the books. As we move into the last 6 weeks of the year, many of you will be looking at doing some basic planning for 2019. My question: are you looking at a potential revenue hit to your commissionable business. Any C-Shares there?
Lots of advisors in the past sold C-Shares as a way to develop a more consistent revenue stream. They traded the upfront load for the 100 bps or so fees long before they started using fee accounts as their primary revenue source. Today that C-Share business is frankly under attack. Broker dealers (BD) are implementing new rules to limit the usage in same cases by limiting the maximum that a client can invest or a maximum holding period. One BD eliminated the usage in total. Looking at fund flows, C-Share business had consistently had negative outflows for the last five years.
Even the fund companies are in on it
So why the decline in business? For many reasons, but primarily:
- Class C-Shares usually have the greatest likelihood of carrying the maximum 1% fee, which frequently pushes the overall expense ratio on a fund to above 2%. In today’s fee-conscious environment costs, especially product costs are being scrutinized by both clients and the regulators
- In our post-DOL but still fiduciary world, the structure of a non-transparent fee to the advisor from the fund company looks like a conflict.
- According to recent articles, fund companies such as Blackrock, Templeton, Fidelity and Putnam are planning or have announced plans to start converting C-Share mutual funds that have been held between seven and 10 years into A-class shares that pay advisors smaller 12b-1 fees.
I don’t plan on using this post to debate the pros and cons of the C-Share business, but I will suggest that if you have any accounts on your books, it is probably time to take a second look (even if it is only a few accounts.) Specifically, it is highly likely that that business is going to move anyway and personally, I always want to lead that discussion with my clients instead of being reactive.
When C-Shares convert to A-shares, the revenue hit to a business can be dramatic. For example, $5 million in client assets invested in C-Share funds would be collecting $50,000 a year in 12b-1 fees, compared to $12,500 from an A-Share version. Therefore, as you are doing your business planning for 2019, it makes sense to create a campaign to help convert those old accounts on your books today. That said, just telling your client you are changing their agreement and fee structure is not easy. Think about what additional value add you can provide as you are creating your campaign. Maybe start with these steps.
- Group all the accounts together to get a better understanding of commonalities or issues that these clients face – create the persona of your C-Share client.
- Look for opportunities to enhance the relationship. See last week’s post about segmented planning as an example.
- Obviously, look at the tactical and operational aspects of the move. In taxable accounts, do you have a plan for any gains? If smaller accounts, are there models-based choices for you to keep the accounts profitable and efficient?
- Practice your conversation before you discuss. There should be a reason for the change, the benefit to the client not just benefit to your business.
C-Shares on your books today, to me, are a risk. Risk by loss of revenue, but also in the perception of the advisor as a consultant or one that is a product vendor. The lack of transparency to the client is a ticking time bomb. It would seem the industry is moving to eliminate them or at least widely curtail their usage. I think it makes sense to get there with your clients well before the industry does.
Please check with your Firm or Firm’s Home Office before implementing any suggestions.
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