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Market Upheaval Upsets Advisor Biz Model

After watching the value of her portfolio drop between 25 to 30 percent, one advisor's client recently asked him why she had to pay him fees when the value of her assets was going down.

After watching the value of her portfolio drop between 25 to 30 percent, one advisor's client recently asked him why she had to pay him fees when the value of her assets was going down. "From a client's perspective, it's a valid question," says the advisor who has a handful of other clients who have expressed similar sentiments. Another advisor says she received a call recently from a top client who said flat out, "I don't want to pay you to lose money." The advisor's response: "I wish I could make you money all the time. It's not easy for anyone right now."

That's for sure. Market conditions, the credit crisis and the economy are all taking a significant toll on the financial services industry these days, and according to some sources the effects will be long-lasting. A recent report by Celent, a financial services consulting firm, suggests "tectonic shifts" in the way investors think and behave with regards to their wealth. The recent economic turmoil may encourage investors to demand lower fees, divide their assets among a number of different experts and, in some cases, do the investing themselves. "Clients now have a true understanding of risk-and they don't like it," says Bob Ellis, senior vice president of wealth management at Celent. Meanwhile, advisors are trying to figure out ways to hold on to client assets-and remain profitable. As assets drop, some are switching from an asset-based fee to an hourly fee or retainer.

The good news is that high-net-worth investors will likely continue to seek financial advice even as their portfolio values sink. The difference is that they probably won't rely on a single advisor or firm to handle their assets. Ellis says more wealthy investors will probably look to diversify their risk by using multiple sources of expertise for their investments.

One Florida-based advisor has already witnessed such a move: Clients at her firm have begun redeeming some, but not all, of their money and moving it elsewhere. "Four of my clients have moved their money out of managed accounts. I'm not sure where they've put the money, but it's not with us," she says. They did leave behind some assets invested in CDs, individual stocks and bonds, but the firm doesn't charge a fee on those investments.

In contrast to high-net-worth investors, the mass affluent may attempt to rely on their own expertise rather than on that of financial advisors, according to some. "The poor performance based on the advice from the full-service firms will reinforce the negative value proposition of the relationship with full-service firms for small investors," Ellis says. That, he says, will result in an "absolute increase" in do-it-yourself investing.

Ultimately, the turmoil in the market, and changes in the way HNW and mass-affluent investors approach advice, will also put downward pressure on fees. Indeed, investors are already using their lousy returns as leverage to renegotiate the wealth management fees they're being charged. "Fees of 100 or 200 basis points are just salt in the wound after the advisor's portfolio management has cost the client 50 percent of its previous value," Ellis says. Celent says clients will likely push for a more flexible compensation model whereby managers charge both a low fixed fee and a small variable fee based on returns in the portfolio.

In this kind of market, moving to a fixed fee may be in advisors' best interest. As assets plummet with the market downturn, those advisors who charge a fee on assets are losing money, says Rusty Benton, CEO of WealthTrust, an RIA holding company based in Nashville, Tenn. "I think we'll maybe see some evolution away from fees on assets under management. There may be a greater shift toward a minimum annual fee. It will take a while because the last thing you want to do is go to an unhappy client and tell them you're changing the way you charge them," he says.

Meg Green, an independent advisor with Royal Alliance, says she's recently considered charging a minimum annual fee. "We're having a tough time too as advisors," she says. Green says she's had clients request that they not be charged at all if they lose money. "I said, 'That's what hedge funds do and I'm not a hedge fund.' I try to remind them of the value added aspects of our services and that we're more than just an investment firm. But if there are clients who don't value the relationship then we don't really want to work with them," she says.






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