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Wealth advisers at banks and independent brokerages generated 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 $2bn in servicing fees for wealth advisers since 2017 even before lucrative upfront commissions, according to a FT analysis of regulatory filings.
The data shows how big banks such as Morgan Stanley, UBS and Bank of America Merrill Lynch and other independent wealth managers benefited from the boom in private funds targeting individual investors before it started to sour last year.
Semi-liquid or “evergreen” vehicles, which allow investors to deposit and withdraw money at set intervals, soared in popularity over the past five years as a long bull run helped expand the ranks of wealthy individuals seeking to diversify their assets.
They also proliferated as a source of predictable and lucrative fees for both private capital firms and wealth advisers.
Some of those funds have turned to net outflows in recent months amid concerns about asset valuations and underwriting standards, with investors seeking to withdraw more than $20bn from private credit vehicles in the first quarter of the year.
“The advisers themselves are stuck in this incentive structure where their behaviour is going to be aligned with pushing clients into these products,” said Shang Chou, the co-founder of the multi-family office Dishmi Capital. “It’s not a surprise that this stuff has been over-allocated to the retail investor base.”
How private capital funds became a lucrative source of fees for brokerages
Private capital funds can pay several different types of fees to advisers, in particular servicing and placement fees.
Servicing fees, which compensate advisers for managing a client’s account and answering questions, are generally worth between 0.25 per cent and 0.85 per cent of the client’s investment each year, with brokerage houses in some instances taking a cut.
Placement fees — payable to big brokerages for the privilege of having their funds offered — can be worth 0.5 per cent of a client’s initial investment on top, though some funds cap the combined fees at 0.85 per cent.
Still, brokerage houses also can charge relatively hefty commissions of up to 3.5 per cent of a client’s investment, although advisers have discretion to waive those fees. Commission rates average about 2 per cent, according to people briefed on the matter.
Independent advisers do not generally charge clients commissions or significant fees to be placed into funds, but instead earn a flat fee as a percentage of the clients’ overall assets.
Blackstone, the industry leader in offering perpetual private credit and real estate funds, has paid out the most 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 out a total of $280mn in servicing fees to brokers, according to financial disclosures.
Breit also lifted a cap that limited the fees it could pay to 8.75 per cent of the fund’s gross capital raised, increasing it to 10 per cent.
The increase means that rather than cutting off a lucrative stream of payments to advisers, Blackstone will be able to pay them hundreds of millions of dollars in additional fees over the coming years if they have clients in the fund.
As scrutiny of private credit has intensified, some on Wall Street have pointed the blame at incentive structures that herded rich investors towards these products as contributing to the asset class’s rapid growth.
“Of course they’re incentivised by these fees,” said Bob Elliott, the co-founder of Unlimited Funds, referring to advisers at big brokerages, also known as wire-houses.
“Any person who has a wire-house adviser knows that they’re constantly being pushed products that are financially [beneficial] for either the adviser or the wire-house, or both.”
Breit has also paid wealth advisers at brokerages more than $500mn in total commissions, according to FT analysis. Funds managed by other large private capital groups also pay those advisers similar rates of commission and servicing fees, filings show.
Funds paying such commissions earn lower returns than comparable lower-fee share classes. The lowest fee rate of Blackstone’s Breit fund has earned an over 9.3 per cent annual return since 2017 and its Bcred fund has earned a 9.5 per cent total return since its 2021 launch.
That compares to higher-fee share classes that have earned annual net returns of 8 per cent and 7.8 per cent, respectively. At Blue Owl and Ares, the gap between returns on the highest and lowest fee vehicles is at least as great since inception.
“Our true north remains delivering superior net returns to our end investors, and that is exactly what we’ve done,” said Blackstone, noting that its property and credit funds have outperformed publicly traded benchmarks by approximately 60 per cent since their inception.
A majority of Blackstone’s evergreen assets were also in share classes that do not charge commissions or servicing fees, the group added.
Banks told the FT that their wealth advisers were bound by a fiduciary interest to steer clients to appropriate investments and were not incentivised by fees.
Morgan Stanley chief executive Ted Pick said on the bank’s earnings call on Wednesday that clients had a relatively small allocation to alternative investments, making up only 5 per cent of the financial advisory business’s total assets.
The bank added that it was often able to “negotiate aggressively” on behalf of clients, leading to lower total fees, and that it had “harmonised our fee structure so advisers are in no way incentivised to offer one type of fund over another”.
One Florida-based wealth adviser said the associated fees helped to get private credit funds off the ground, before allocations snowballed and wealthy investors began hearing about opportunities from friends or colleagues.
“Last year, private credit was what every client was talking about,” he said. “If you were an adviser and you didn’t have access to private credit, someone else was probably talking to your client about it.”
