UBS has tweaked its rules that ding advisors’ compensation if they offer clients advisory fee discounts beyond certain thresholds.
Specifically, the firm set time limits of two years on any exceptions or waivers granted to its FAs from its so-called discount sharing policy, which one recruiter has described as “despised.”
In general, many broker-dealers impose discount sharing policies on their advisors.
Advisors receive less than their standard payout when accounts are priced below certain levels, according to UBS. If advisors discount the UBS Investment Advisory Fee below certain levels, they may do so but may earn reduced compensation associated with the discount, the wirehouse says in an SEC filing.
Broker-dealer managers put the policies in place to discourage advisors from discounting their advisory services beyond certain set amounts, according to recruiters.
As a hypothetical example: if advisors charge a client an undiscounted advisory fee of $1,000, the FAs may get 40% ($400) and the firm may get 60% ($600) of that amount, according to one recruiter. But if the advisors give the clients a discount and charge half of the advisory fee ($500), under a discount sharing policy, the firm may reduce the advisors’ percentage of that amount to 25% (so only $125) and increase the firm’s take to 75% ($375).
Typically, some advisors have asked and received from management exceptions or waivers to those discount sharing policies, according to Danny Sarch, president of recruiting firm Leitner Sarch Consultants.
If a client, for example, is a CPA or a professional who is influential with prospective wealth management clients and commits to helping draw additional assets to the firm, the FA may persuade management to allow a discount sharing waiver to persist for years, Sarch says.
“These are not trusted; they are despised,” Sarch says about discount sharing policies.
The policies are so disliked that RIA channel leaders view them as a potential rationale for brokers at broker-dealer firms to go independent.
“The discount sharing structures at wirehouses continue to illuminate the value of Dynasty’s independent model, where advisors structure a fee arrangement appropriate for each client without having to worry about policies designed to protect the bank’s economics at the expense of advisor compensation,” David Wiener, head of network development at Dynasty Financial Partners, which has persuaded multiple ex-UBS advisors to break away from the firm and join its channel.
Independent regional broker-dealer Raymond James does not impose a discount sharing policy on its FAs, according to a spokesperson. And that has been a selling point when recruiting for Raymond James, Sarch says.
According to UBS’ filing with the SEC, it will bar waivers or exceptions from its discount sharing policies from exceeding two years.
A UBS spokesperson declined to comment on the changes.
In its SEC filing, however, the firm notes that the waivers give FAs “the flexibility to price advisory accounts at lower fee levels, which can benefit clients, but also provides an incentive for them to recommend moving from brokerage to advisory programs to their clients.”
The FAs may want to make that switch “to recoup future compensation lost potentially due” a single share class initiative, which it will unveil in January, UBS wrote to the SEC.
The single share class initiative will lead the firm to offer mutual funds with no front-end loads, back-end loads or annual marketing distribution fees (12b-1s), some of which have historically been paid directly to advisors.
SMA marketing and pricing strategy
In the same SEC filing, UBS formally introduced to the regulators a new separately managed accounts marketing and pricing strategy, which FAs had learned about previously in October.
The firm is introducing in January new SMA select strategies and will reduce the SMA management fees to zero for clients who choose those, according to the filing.
UBS managers told FAs when they first unveiled the new marketing and pricing SMA plans in October they were simplifying, expanding choice and transparency, and aligning the firm's offerings with the SEC’s Regulation Best Interest rule.
The SMA pricing strategy will be welcomed by some advisors but viewed skeptically by others, says Mark Elzweig, a recruiter and president of New York-based Mark Elzweig Company.
“The zero commission on UBS AM SMA strategy accomplishes a few things,” he says.
It gives UBS advisors a pricing advantage relative to advisors at other firms and encourages clients to transfer more assets into UBS, hopefully into higher margin businesses like lending, according to Elzweig.
“If UBS can convince outside managers in its SMA programs to adopt similar pricing, then they will have succeeded in using their distribution clout to reduce client fees across the board. Presumably, they’ll have to pay outside managers something, but probably less than they are getting now. This is likely a response to Reg BI — acting in the client’s best interest,” he says.
“This will cut both ways for advisors. While it will give a pricing advantage to those advisors who want it, it will make these accounts a little harder to transfer out. Wirehouse advisors generally don’t like anything that impinges upon their freedom to transport clients elsewhere,” he adds.