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Ignore the Next Big Thing? Who would do such a thing? The fee-based model, with its steady stream of revenue, is an attractive way of doing business for lots of advisors. And it has been billed as the newest rage for years now. But there are still some reps who feel the traditional transaction-based commission business is right for them. Sure, that may not be big news, but try this: In the 2007 Cambridge

Ignore the Next Big Thing? Who would do such a thing? The fee-based model, with its steady stream of revenue, is an attractive way of doing business for lots of advisors. And it has been billed as the newest rage for years now. But there are still some reps who feel the traditional transaction-based commission business is right for them. Sure, that may not be big news, but try this: In the 2007 Cambridge Investment Research/Registered Rep. “Survey of Business Practices,” many of those same advisors said they have no plans to move towards a primarily fee-based business model over the next year. In effect, that means they are resigning themselves to the little leagues: The survey also shows that commission-based reps have smaller client accounts and fewer assets than their fee-gathering peers.

“On average, the big guys are no longer stock and bond guys, they're managed-money guys,” says Andre Cappon, president of consulting firm CBM Group in New York.

But let's face it: The fee-based model may not be the best option for small-time reps — or their small-time clients. Respondents who said the majority of their revenue comes from primarily commission-based business have an average of $58.5 million in assets under management (AUM), and an average client account size of $185,817; those who said their revenue primarily comes from fees averaged $84 million in AUM, and an average client-account size of $433,824. The bottom line: Advisors using the fee-based model are typically working with clients with about $500,000 or more, according to Moss Adams consultant Philip Palaveev. Since respondents in our survey have average client accounts worth about half of that, $255,432, the commission-based model remains the model of choice for many reps.

Stick With What You Know

Even though it may dampen their wages, commission-based brokers tend to be set in their ways. Most of them have no plans to change their business mix. In fact, nearly two-thirds of respondents with commission-based businesses said they were unlikely, or not at all likely, to move towards a more fee-based mix over the coming year. The funny thing is, only a handful of these guys still call themselves brokers (8 percent.) The rest say they are financial advisors (52 percent), and financial planners or investment advisors (8 percent).

“Up to 10 years ago, this business was almost 100 percent commission-based, and the fee-for-service asset-advisory business was an emerging one,” says Jim Guy, chief marketing officer of Cambridge Investment Research. “Industries don't change overnight.”

Age Is More Than Just A Number

The wide divergence in average account size and average assets per advisor can be partly explained by length of experience. Survey respondents with 20 years or less of experience in the industry tended to get more revenue from commissions, but those with 20 or more years of experience tended to have more fee revenue. “A lot of advisors have a hard time being a fee-based advisor from scratch,” says Dennis Gallant, principal with Gallant Distribution Consulting in Sherborn, Mass.

At the same time, the idea that experienced reps are taking on the fee-based model also highlights the increasing age of the advisor population. Survey respondents said they have been in the industry an average of 14 years; some 30 percent said they have been in the industry for 20 years or longer. Simply put, the advisor population is graying alongside the baby boomers it serves, and some experts predict a shortage of experienced reps within the next 10 years: Top advisors are beginning to retire and exit the business faster than they can be replaced.

Slow And Steady Toward The Fee-Based Model

Still, while reps surveyed generally reported smaller practices and client accounts, and primarily commission-based revenue, overall there has been an increase in fee-based business as a percentage of total industry revenue over the last few years. Three years ago, 25 percent of advisor revenue came from fees, compared with 35 percent today. For advisors doing a mix of fee- and commission-based business, 33 percent of their revenue now comes from fee-based business, compared with 26 percent three years ago.

Advisors affiliated with registered investment-advisory (RIA) firms still have the largest portion of revenue coming from fee-based assets. Today, 68 percent of RIA revenue comes from fee-based business, according to the survey, up from 58 percent three years ago. But it's not just the RIAs. Every advisor channel — including wirehouses, financial-planning firms, regional brokerages and independent brokerages — also experienced an increase in the percentage of revenue coming from fee-based business. Wirehouses and RIA firms indicate that they have more fee-based business as a percentage of total revenues compared with other kinds of firms, according to the survey (48 percent and 68 percent, respectively). That's no surprise since wirehouses have long been making a push to get their reps on the fee-based bandwagon in an effort to ensure a more reliable (non market-dependent) revenue stream.

What A Rep Wants

According to our survey, technology and independence are advisors' top concerns when evaluating their broker/dealers. Reps were asked to rate various attriubutes and services of a b/d according to importance and according to their level of satisfaction with them. The biggest gap between the rep's ranking of the importance of an attribute or service and his satisfaction with it came in the category of technology. Some 85 percent of respondents said technology is the most important consideration when they choose a b/d. Yet reps ranked their satisfaction with technology at just 57 percent.

Peter Grifo, vice president of recruiting at Cadaret, Grant, says 10 years ago the wirehouses had the independents beat when it came to what they could offer reps because of the cost of technology. Independent firms didn't have the scale or the resources to make big investments in advanced technology so they fell behind the bigger firms. But over the past several years, that gap has largely been erased, and now the better firms more or less have the same levels of technological capability. So it is not so much the technology itself that differentiates one firm from another as it is technology support and service, he says.

Perhaps the most surprising result of the study is that reps said they place very little importance on equity participation when choosing a b/d. In fact, equity participation ranked 15 out of 16, or second to last, in importance. That suggests some b/ds may be taking the wrong tack: Many of them are offering equity partnership within the firm in order to attract more advisors.

Investors Capital, of Lynnfield, Mass.; Girard Securities, of San Diego; American Portfolios Financial Services in Holbrook, N.Y.; and Fairfield, Iowa-based Cambridge Investment Research (the sponsors of the survey), are just some of the firms offering equity to some of their reps.

The trend is also popular in the RIA world. Rob Francis, founding partner of Quintile Wealth Management, a Los Angeles-based RIA, recently told Registered Rep., “One of the competitive advantages of Kochis/Quintile is that equity participation is part of the culture. There is plenty of talent out there looking for the right home — a safe place to serve clients — where they can participate in economic benefits in a way that's consistent with serving their clients.”

You're Charging What?

While the majority of reps say they charge an average fee of 1 percent of client assets under management (and nearly 75 percent of respondents said that number has not changed over the past year), a surprising 19 percent said they charge 2 percent, and some even say they charge 3 or more percent. “It's shocking,” say Palaveev. “What are these advisors doing [for their clients]?”

Well, it's hard to imagine where that extra value is coming from, since almost all (92 percent) of the respondents said they use mutual funds, and more than 75 percent are recommending variable annuities and insurance products.

Who's Managing What?

Half of the respondents indicated that an average 50 percent of their business is managed by a third party; other respondents indicated half of their fee-based business is self-managed. “Realistically, how many of those advisors have the time to do manager research, equity research and actually manage funds, as opposed to delegating to a third party?” Palaveev asks.

Perhaps respondents meant “self-managed” in the sense that they exercise discretionary control over client's assets while relying on their firm's research. Also, since the majority of respondents are commission-based reps, they may manage in the sense of a traditional business model where they are doing their own research, and picking products for clients.

“The older brokers might be holding onto the old model. If you get a broker who is in his 50s or 60s, it's more likely that he will still be doing a traditional business,” says Cappon. “Often the better brokers are portfolio managers who do their own research and look at [outside] research, rather than a salesman, who says, ‘I'm going to put you into this or that managed product.’”


In October 2007, the research unit of Registered Rep.'s parent organization, Penton Media, invited, via email, 13,366 readers to participate in an online survey. In all, 3.3 percent, or 438 surveys were completed.

Cambridge Investment Research, an independent broker/dealer, sponsored the survey, but respondents were not made aware of this fact.


Which of the following best describes your job function?
Financial Advisor 52%
Financial Planner 8
Investment Advisor 8
Broker 8
Wealth Advisor 6
Insurance Agent 4
Life Planner 0
Other 11


Which of the following licenses/designations do you have?
Series 7 86%
Life and disability 65
Series 66 42
Series 65 (IAR) 40
Series 6 27
Series 24 23
CFP 13
ChFC 6
Other 32


How long have you been an investment professional?
30 years or longer 8%
20 to 25 years 22
15 to 19 years 12
10 to 14 years 14
5 to 9 years 21
Less than 5 years 17
No answer 7


Currently, approximately what percentage of your revenue comes from each of the following sources?
Primarily fee-based business (80% to 100% fees) 16%
Mix of fees and commissions 33
Primarily commission-based business (80% to 100% commissions) 45
No answer 6


Commissions Fees
Five years or less
69% 31%
Three years ago 79 21
Six to 20 years
66 34
Three years ago 77 23
More than 20 years
59 41
Three years ago 68 32


How important are the following when choosing a b/d firm to work for? How do you rate your current b/d on the following? Percent rating 4 or 5 on a 5-point scale, where 1= “not at all important/satisfied” and 5 = “extremely important/satisfied.”

Importance Satisfaction
Technology 85% 57%
Independence 83 76
Flexibility 82 67
Payout Structure 80 61
Back Office 80 64
Online access to client account statements 78 76
Support with compliance issues 78 66
Open architecture 66 61
Practice management support 66 55
Training 65 52
Access to electronic trades 60 67
Clearing firms 58 65
Fee account discretion 49 55
Separate account management 48 55
Equity participation 38 44
Customizable website templates 31 39


As a percentage of assets under management, what is the average fee you charge your clients?

1% 64%
2% 19
3% or more 4
No answer 14
How has this percentage changed over the last year?
Increased 11%
Remained the same 74
Decreased 14
No answer 2


What of the following products do you currently recommend to clients?

Mutual Funds 92%
Variable Annuities 76
Insurance Products (e.g., LTC, Term Life Whole Life, etc.) 76
Bonds 67
Stocks 66
Retirement/Pension products 65
Exchange Traded Funds (ETFs) 53
Separately Managed Accounts 51
Fixed Annuities 43
International 41
Investments/ADRs Options 19
Limited Partnerships 14
Hedge Funds 9
Other 8
No Answer 2


What percentage of your business is self-managed versus managed by a third party?

Self Third Party
Total 50% 50%
Financial-planning firm 56 44
Independent brokerage 56 44
National wirehouse 38 62
Regional brokerage 42 58
Bank brokerage 47 53
RIA firm 79 21
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