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Wealth advisors at banks and independent brokerages earned billions of dollars in fees by steering individual investors into private market funds, which many retail investors are now trying to flee.
Sixteen funds, including those managed by Blackstone, Blue Owl, Apollo and KKR, have generated more than $2 billion in servicing fees for wealth advisors since 2017, even before lucrative upfront commissions, according to an FT analysis of regulatory filings.
The data showed that big banks such as Morgan Stanley, UBS and Bank of America Merrill Lynch and other independent wealth managers had benefited from a surge in private funds targeting individual investors before the decline began last year.
Semi-liquid or “evergreen” vehicles, which allow investors to deposit and withdraw money at scheduled intervals, have grown in popularity over the past five years as a prolonged boom period has helped expand the range of wealthy individuals looking to diversify their assets.
They also spread as a source of predictable and attractive fees for both private capital firms and wealth advisors.
Some of those funds have turned to net outflows in recent months amid concerns about asset valuations and underwriting standards, with investors seeking to pull more than $20 billion from private credit vehicles in the first quarter of the year.
“Advisers themselves are trapped in this incentive structure, where their behavior will be more in line with pushing clients into these products,” said Shang Chou, co-founder of multi-family office DishMe Capital. “It is no surprise that this stuff is highly allocated to the retail investor base.”
How private capital funds became a lucrative source of fees for brokerage
Private capital funds may pay many different types of fees to advisors, in particular servicing and placement fees.
Servicing fees, which compensate advisors for managing a client’s account and answering questions, typically range between 0.25 percent and 0.85 percent of a client’s investment each year, with brokerage houses taking a cut in some cases.
Placement fees – paid to large brokerages for the privilege of offering their funds – can be as much as 0.5 percent of a client’s initial investment, although some funds cap the combined fee at 0.85 percent.
Nevertheless, brokerage houses can also charge relatively hefty commissions, up to 3.5 percent of a client’s investment, although advisors have the discretion to waive those charges. According to people with knowledge of the matter, the commission rate averages around 2 percent.
Independent advisors generally do not charge clients commissions or significant fees for investing in funds, but instead earn a flat fee as a percentage of clients’ total assets.
Blackstone, an industry leader in offering permanent private loans and real estate funds, has the highest payouts in servicing fees and commissions.
Its property fund Breit and lending vehicle Bcred have attracted more than $100bn in combined net assets since 2020. Last year, the two funds paid a total of $280mn in servicing fees to brokers, according to financial disclosures.
Breit also removed the limit under which it could limit fees to 8.75 percent of the fund’s gross capital raised, which was increased to 10 percent.
The increase means that instead of cutting into a lucrative stream of payments to advisors, Blackstone will be able to pay them hundreds of millions of dollars in additional fees in coming years if they have clients at the fund.
As scrutiny of private debt has intensified, some on Wall Street have blamed the incentive structures that attract wealthy investors to these products for contributing to the rapid growth of the asset class.
“They’re certainly incentivized by these fees,” said Bob Elliott, co-founder of Unlimited Funds, referring to advisers at big brokerages, also known as wire-houses.
“Anyone who has had a wire-house advisor knows that they are constantly being pushed products that are economically (beneficial) to the advisor or the wire-house or both.”
According to FT analysis, Breit has paid out more than $500 million in total commissions to wealth advisers at the brokerage. Funds managed by other large private capital groups also pay similar rates of commissions and servicing fees to those advisers, the filings show.
Funds that pay such commissions earn lower returns than comparable low-fee share classes. Blackstone’s lowest-fee Breit fund has generated annual returns of more than 9.3 percent since 2017, and its BCredit fund has generated a total return of 9.5 percent since its 2021 launch.
This compares with higher-fee share classes, which have generated annual net returns of 8 percent and 7.8 percent, respectively. At Blue Owl and Ares, the gap between returns on the vehicles with the highest and lowest fees from the outset is at least as large.
“Our true answer is providing better net returns to our end investors, and that’s what we’ve done,” Blackstone said, noting that its asset and credit funds have outperformed publicly traded benchmarks by about 60 percent since their inception.
The group said most of Blackstone’s evergreen assets were also in share classes that do not charge commissions or servicing fees.
Banks told the FT that their wealth advisors were bound by a fiduciary interest in motivating clients to make appropriate investments and were not incentivized by fees.
Morgan Stanley Chief Executive Ted Pick said on the bank’s earnings call Wednesday that clients had a relatively small allocation to alternative investments, accounting for only 5 percent of the financial advisory business’s total assets.
The bank said it was often able to “negotiate aggressively” on behalf of clients, thereby reducing overall fees, and that it had “harmonized our fee structure so that advisors are in no way encouraged to offer one type of fund over another”.
A Florida-based wealth advisor said affiliate fees helped get private credit funds off the ground, before allocations snowballed and wealthy investors started hearing about opportunities from friends or colleagues.
“Last year, personal loans were what every customer was talking about,” he said. “If you were an advisor and you didn’t have access to a private loan, someone else was probably talking to your client about it.”
