Wall Street's latest obsession is the fee-based financial advisor, a term that implies a holistic, goal-oriented approach to money management. Today, many of the bulge-bracket firms, and even more regional wirehouses, prefer this “financial advisor” and its percent-of-assets revenue-generating model to the traditional commissioned-based transaction one.
Fair enough. Financial advisory has its place: people need planning, insurance, annuities and modern portfolio theory. But people also need investment advice. Indeed, many demand it, which is why a market — and a robust one at that — persists for the traditional commission-based stockbroker. “I have a real estate company guy who says that he wants to talk to me only two or three times a year. He's busy. He wants me to handle the details and provide investment ideas,” says Jeff Doeden, a commission-based stockbroker and advisor at First Midwest Securities. For that client, the commission-based approach is perfect.
But how does a commission-based broker go about finding these kinds of clients in today's fee-obsessed environment? In fact, commission brokers have some advantages when it comes to advice on individual securities, cost, tax management and a unique investing approach.
Many brokers still rely on telephone soliciting, which can be a frustrating and fruitless undertaking. Earl Feldhorn, senior vice president at Wedbush Morgan, has an answer to that — he calls it “warm calling,” making a pitch-free call about a specific investing subject he can discuss with the person on the other end of the line. For example, when Feldhorn entered the business 40 years ago he followed dental stocks and would call dentists to discuss their opinion on a company he was considering as an investment. He found, in the process, a rapport would develop, which often lead to the dentist becoming a client. Over the years, Feldhorn applied this strategy to individuals in other occupations with equal success.
Specific events at large and local publicly traded business can also be fertile ground for prospective clients. Brad Hansen, a commission-based broker at D.A. Davidson who lives and works in Salt Lake City, recalls leveraging a Utah Power and Light special cash distribution. “I knew people who invested in Utah Power who could use help with investing that distribution,” he says. “After contacting those people, not only did I gain additional assets but I also gained a bunch of referrals as well. I think I gathered 60 accounts from Utah Power alone.”
Feldhorn also relies on his performance record as a selling point, but to a limited degree. “I'm comfortable presenting accounts as examples to clients where the client exactly followed my advice,” he says. “In that instance I can show an account that used my ideas and accurately state that my 10-year average return was 15 percent on that strategy.”
Cost can be another valuable marketing variable when promoting commission-based service over fee-based service. A surfeit of articles has been penned expounding the cost advantage of the fee-based model. The facts, though, often prove otherwise. “If you have a client with 30 stocks worth $500,000 and you only sold five investments and replaced them with another five during the year, that could cost as little as $2,500 based on an average trading cost of $250 each way,” says Hansen. “But if a guy is charging a wrap fee of 1.5 percent, that's $7,500.”
You can also pitch prospective clients on the tax advantages of the commission-based model. “The best tax-deferred investment is a good stock,” says Hansen. “You don't pay taxes until you sell it, and you pay a 15 percent rate when you do. You can build a portfolio with individual stocks and bonds and pay no frictional costs like management fees during the holding period. Separately managed accounts pretend they have tax control, but they don't.”
First Midwest Securities' Doeden also markets to prospective clients his particular investing approach, which leans on stocks and municipal bonds. He explains: “If a stock is up 65 percent and we sell, I'll take most of the profits and put it into a municipal bond. Say we have a $75,000 stock position. I might take $25,000 of that gain and put in muni bonds. It removes that gambling mentality. It is a very effective strategy for clients in the top-tier tax brackets.”
Many investment professionals espouse the benefits of contrarian investing; perhaps the same logic can be applied to the benefits of taking a contrarian approach to your business model. “The supply of traditional transaction-based stockbrokers is contracting,” says Feldhorn, “but that's a big plus for me,” he says, because there's still plenty of demand for transaction-based service.