A rise in AuM in a certain kind of wealth management account has got a group tracking the sector worried.

When assets under management rise it usually prompts feel-good comments and news headlines, but for one organization tracking the sector, an AuM rise is not welcome.

Rep-as-advisor assets surged by 26 per cent year-on-year in 2017 to reach $1.063 trillion, following notable gains in 2016 and reversing a 3 per cent dip in 2015, according to Cerulli Associates, the analytics and research firm. These are fee-based nondiscretionary advisory accounts in which the advisor must obtain approval each time a change is made to the account or its investments.

As with rep-as-portfolio-manager programs, advice is an essential element of this type of program, and advisors and firms must be registered with both FINRA and the SEC. These programs typically use individual securities and mutual funds.

Cerulli is concerned because it argues that rep-as-advisor structures are an inefficient way to manage accounts.

“These accounts present pitfalls, including concerns that some advisors who use them function as rep-as-portfolio managers (RPMs), but without the appropriate investment agreements in place,” Tom O’Shea, director at Cerulli, said.

“There appear to be some advisors of RA clients who do not obtain client consent for each action in the portfolio, effectively managing with full discretion,” he continued. “When questioned, these advisors often say they have an ‘informal arrangement’ with their customers. Such arrangements place both the advisor and the firm at risk,” he said. 

Cerulli argued that there are two other risks with such accounts – “reverse churning” and improper recommendation of an RA account.

“Advisors who move their book of business from commission-based accounts to fee-based, nondiscretionary accounts need to reshape their practice from a transactional model to a model of ongoing dialogue with customers, or risk running foul of regulations,” O’Shea said. “To avoid accusations of reverse churning, they must resist the temptation to sit back and collect a recurring fee without engaging with their clients regularly,” he said. 

Regarding the risk of improper recommendation of an RA account, O’Shea says, “The timing of transactions in an account is an important factor in whether an advisor should recommend a client move from a commission-based account to a fee-based account.” For instance, placing a client in a commissionable mutual fund and then moving the client to a fee-based account invites regulatory scrutiny, he said. 

The world of commission-based investment accounts and advisor-based fees has been thrown up into the air with the derailment of the Department of Labor Fidicuary Rule, a measure that had been billed as creating unstoppable momentum towards moving away from sales-based commission models. 

(The editors at Family Wealth Report are interested to know from practitioners what their views are about this matter. Email tom.burroughes@wealthbriefing.com)