Many large banks this earnings season fretted about revenue declines in their brokerage units, with at least two attributing the drop to the ongoing transition to fee-based advisory business.

The downtick was due to the "strategic shift to managed money solutions for our clients," SunTrust CFO Aleem Gillani said of the 3% year-over-year drop. "While this is a negative for near-term retail investment income growth, it is a positive for clients and the long-term health of our business," he said during the earnings call.

Bloomberg News

Citizens Bank's interim CFO, John Fawcett, also blamed a "mix shift" for the bank's 13% year-over-year revenue drop in trust and investment management fees. "We've had some near-term revenue headwinds," he said.

Ever since the fiduciary rule started looking as though it would pass, banks have pushed to accelerate the move to advisory business, which was already well underway, said Tim Kehrer, senior research analyst at consulting firm Kehrer Bielan Research & Consulting. Kehrer anticipates that the transition will continue regardless of whether the rule is implemented as planned or modified, delayed or even rescinded.

"We see it compressing five years of transition into one year," Kehrer said.

The shift is likely to be rocky with banks bracing for a period during which revenue will fall before it begins to climb. The length of time it takes to start growing revenue will depend on a number of factors, including how much of the business shifts to advisory, how much has already shifted, and the difference between the advisory fees and the average commission level, according to Kehrer.

"The typical advisory fee in banks is about 1.25%, while commissions on transaction products run from 2% to 6%, so you can see how product mix impacts the break-even point," said Kehrer.

Banks can generally expect revenue to start growing again in three to five years, but given the new regulatory and competitive environment, the old rule of thumb may no longer apply.

"It looks like advisory fees are coming down due both to the fiduciary rule's reasonable fees dictum and extreme pricing pressure from digital advisers and the large ETF providers," Kehrer said. Vanguard, for example, offers advisory products with fees of .09% to .25%, undercutting the 1.25% advisory fee typically charged by banks.

Both SunTrust, which began its shift to fee-based business more than a year ago, and Citizens expected their revenue to build in 2017 from 2016.

"We should be able to see some growth in wealth next year," said Citizens CEO Bruce Van Saun, adding that with the expansion of its sales force "the lines will cross."

The transition to advisory business may not be the only reason for the decline in brokerage revenue. The fiduciary rule has knocked many advisers off their feet as they worry about the impact of the rule on their compensation and their overall practices, according to Kehrer.

"All that uncertainty has certainly distracted many advisers," Kehrer said.

Regions Bank and M&T Bank were among the banks that reported year-over-year revenue declines in the fourth quarter, but they did not specify the reasons for the downswing. Brokerage revenue at Regions Bank plunged 20%. At M&T, it fell 2%.

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