Relatively few brokers are increasing their commitment to fee-based advisory practices, even in this everything-to-gain-from-change economic environment.
Citing data from several surveys, Boston-based Cerulli Associates determined that commission-based payouts still account for between 60 percent and 80 percent of financial advisory revenue.
The finding is somewhat surprising, given that many firms, in their efforts to plug revenue gaps, are pushing reps toward fee-based practices. And it's doubly surprising because a significant proportion of the big firms' revenues are now being classified as “recurring” — which is the idea behind annual asset-based fees.
Financial advisors have an explanation: The down market is hindering many advisors who want to make the transition. “If you're an existing commissionable broker, it's a tough challenge to transition” to fee-based practices, says Mark Balasa, president of Balasa Dinverno Foltz & Hoffman, a fee-only wealth management firm in Schaumburg, Ill.
“With the market going down, clients don't want to pay a fee,” says one Wachovia broker.
He notes that if commissions are suffering, advisors have incentive to change, but less money to help them through the dip in pay that inevitably accompanies transitions to fee-based services.
Cerulli estimates that advisors making the transition take a 75 percent “haircut” in their first year. “In a down market, it can take seven years to get predominantly fee-based,” says Dennis Gallant, a director at Cerulli.
Determining how much of the industry has embraced the fee-based model is not an easy matter, Gallant says. Firms care less about the distinction between fee-based and commission-based revenues than they do about recurring and non-recurring. For this reason, money from fee-based services is often lumped in with, for instance, revenues from mutual fund wrap programs and trailing commissions resulting from sales of “C” shares.
For brokers, however, the fee/commission distinction is an important one, because fee-based arrangements truly recur, while commission-based revenues are less predictable in a long-term sense.
There are a number of explanations for brokers' reluctance to embrace fee-based services. Gerry Burchard of Round Hill Securities in Alamo, Calif., for example, views the model as a threat. He says the management control brokers cede in a fee-based model undermines the broker/client relationship.
“You've made yourself less important” to the client, says Burchard. “If you leave the firm someday, why are your clients going to want to leave with you?” Despite this sentiment, 80 percent of brokers responding to a Cerulli survey said they planned to increase their fee-based revenues over the next 12 months.
Evidence suggests that brokers who make it through the initial compensation dip are rewarded later. According to Cerulli, advisors who convert 40 percent of their book to fee-based business (typically over three to five years) generally double their level of fee-based business in the following year.