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Coronavirus Crisis Could Hasten Changes to Advisory Fees

For many advisors, the pandemic will highlight the mismatch between the services they provide and their AUM-based compensation model, according to Aite Group.

The majority of financial advisors charge a percentage of assets under management and are likely to take a revenue hit as a result of the COVID-19 pandemic's effects on the stock market. That may hasten a trend already underway toward alternative compensation models, according to an analyst from the Aite Group.

While advisors charge fees based on core services like investment management and retirement planning, clients often need additional help, particularly during times of stress. That includes debt consolidation, mortgages, career counseling for clients’ younger children and strategies for elder care.

“There’s a whole host of services that cost money and take time for the advisor to execute for their clients, but they don’t necessarily get paid for them,” said Aite Group senior analyst Wally Okby. “For firms, they have to be very careful with their expenses, they have to pay fairly, and they have to incentivize advisors to bring in new clients, new blood. So there’s this natural tension that’s really only become more evident now in the COVID-19 environment when the asset levels are changing a lot from day-to-day.”

Sixty-six percent of advisors said their compensation came from AUM-based fees, according to the newly released Aite Group report Transformation of Global Financial Advisor Compensation Models: What Lies Ahead?”—based on survey data collected during 2019. Those advisors predicted that percentage would rise to 83% over the next three years. Advice-based compensation, these advisors said, would only increase “marginally” from 6% to 8%. (Commission-based fees were expected to fall from 27% to 8% of total advisor compensation.)

But the pandemic will likely prompt advisors to move deeper into advice-based fees than that survey suggests. “The COVID-19 financial crisis will prompt firms to reconsider their compensation models,” Okby said. “It’s impossible that won’t happen.”

Advisors with many elder clients offer an example of how the fee-for-service model may shift, according to Okby. Some of those advisors may be turning more attention to health care issues and family legacy planning with those clients, even as they are not paid for those services. Doing more, while less revenue is coming in, will force many advisors to reconsider how they charge clients.

The trend was already underway, according to XYPN co-founder Alan Moore. He said advisors often transition from commission to AUM-based fees, and then move from relying on AUM-based fees to fee-for-service models. Thus far, Moore said he hadn’t heard of firms making compensation changes due to COVID-19.

“But I do suspect that firms are going to be looking to move from fixed compensation to variable compensation with profit-based bonuses, since that allows firms to easily trim compensation during a down market like this without having to reduce compensation directly or do layoffs,” he said.

To be sure, it’s unlikely advisors introduce any compensation changes until the volatility of the COVID-19 crisis subsides. In the midst of the market swings, no advisor was likely to increase the fees it charges to clients. But when the pandemic fades, many advisors will understand the need to align their service and their fees, according to Okby.

“These types of conversations are hard to have in the best of times,” Okby said. “When things stabilize to a certain extent, they have to position it in a way that makes it appealing to their client and make it feel like their incentive is aligned with advisors.”

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