WARNING: Market Shock Imminent

Join us on September 29 at 4 p.m. ET at the Market Shock 2022 event to find out what’s coming and how to profit.

Thu, September 29 at 4:00PM ET

Rival Banks Could Follow Wells Fargo Down This Unexpected Path

A major paradigm shift is underway in how investors get advice and make stock trades. Rather than resist it, Wells Fargo (NYSE:WFC) is going with it. Though rival banks and brokerage firms have yet to do the same, they soon could, if Wells Fargo makes the new model work. WFC stock is up 3.4% this year, far behind its peers.

That’s a very big “if,” however.

The 2016 account-opening scandal has not only created a headwind for Wells Fargo stock, the bank’s tainted reputation has reportedly crimped the credibility of its advisor corps. Some are leaving the company altogether in search of greener pastures. The new initiative may quell that exodus, and simultaneously prove to be an even-better fit for customers. Or, it could make matters even worse by making them even more confusing.

Either way, all owners of bank stocks may want to take note of the brokerage industry’s potential pivot. WFC stock is the fifth-largest position in the 25-stock portfolio of the Invesco KBW Bank ETF (NASDAQ:KBWB), which has gained 13.3% in 2019.

Tipping Point

Being a stockbroker has never been an easy job, but the business has become particularly tough in recent years. Changes in compensation plans now seem to be the new norm, with each overhaul somehow making it tougher for advisors to maintain their income, while the brokerage firm itself is able to tuck away more and more of the revenue generated by its workers.

Case(s) in point: Bank of America (NYSE:BAC), parent of Merrill Lynch, faced another round of revolt in November when its so-called “growth grid” (of how it calculates advisor earnings) was once again altered in a way that favors proprietary products that Merrill brokers don’t necessarily want to sell. Morgan Stanley (NYSE:MS) rolled out its latest round of pay changes in July of last year.

Most banks and brokerage firms have introduced at least minor changes in compensation plans in recent months, in fact, aggravating their advisors each time.

The business has evolved, however, with an old but relatively niche model becoming quite popular of late thanks to its simplicity and transparency.

They’re called registered investment advisors, or RIAs for short. Their key difference with traditional brokerage houses is how they collect revenue from customers and pass a portion of that along to brokers. The RIA model imposes a fee — usually a small percentage of the total assets being managed — while stockbrokers have historically earned a commission on stock trades and sales of related products and services.

The latter opens the door to conflicts of interest, and though the RIA model arguably imposes fees that may not otherwise be incurred, investors love that they sit on the same side of the table as registered advisors.

Until late last year, Wells Fargo fought to maintain what had been the more lucrative brokerage model. In the era of robo-advisors and tremendously empowered investors though, in December it announced it would facilitate RIAs that wanted to set up shop under the Wells Fargo brand.

It was the first major banking name to cross that line.

Unclear Potential

Last quarter, Wells Fargo once again saw net-losses in its total number of advisors. Down another 1% from Q3’s total, to 13,968, the organization has lost roughly 1,000 of its brokers since 2016’s unauthorized accounts debacle.

“They have a lot of capabilities that they could offer RIAs, such as banking. I think they could attract established RIAs,” says industry recruiter Mark Elzweig, adding “and I think they could especially attract people from smaller independent broker-dealers.”

The option would also be available to existing Wells Fargo brokers, some of whom are already considered ‘independent,’ provided they fit the profile.

It remains to be seen just how many would-be outside fee-based advisors are interested in working with Wells Fargo in this capacity though, and what the payoff may be.

Shirl Penney, head of RIA platform Dynasty Financial Partners, explains “If more [assets] came from other channels of Wells than from competitors, then it will have been more of a defensive play than an offensive one. If that is the case, it would only be a marginal win for Wells, as employee channels tend to be more profitable to the banks versus open-choice platforms.”

Indeed, despite the new business model being made available, Wells Fargo just lost a pair of advisors who managed $1 billion worth of brokerage assets to Los Angeles-based RIA AdvicePeriod.

It’s not an auspicious start for the San Francisco bank.

Bottom Line for Wells Fargo Stock

It’s still only an experiment of sorts at this stage, with Wells Fargo Advisors president David Kowach explaining in December that branded registered investment advisor offices would only be established “in a few cities” this year. As is the case with all experiments, however, if it goes will, WFC stock holders can expect the experiment to become a more permanent development.

If it goes well, of course, it would be surprising if other banking and brokerage names didn’t follow that lead.

To that end, for better or worse, Wells Fargo may not have much to gain in terms of earnings growth by making the RIA model work. Its wealth-management arm accounted for less than one-fifth of last quarter’s revenue, and roughly one-tenth of the company’s total net income. On a per share basis, even a smashing success with its RIA model wouldn’t move the needle much for Wells Fargo stock.

Not so for many of its its competitors, who extract relatively much more revenue and profits from the marketplace with offerings outside of the familiar deposit and lending business.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media, https://investorplace.com/2019/02/wells-fargo-stock-ria-advisor-fimg/.

©2022 InvestorPlace Media, LLC