Are Fee-based Financial Planners Taking all the Business?
It certainly looks that way to me. Throughout my eight years in the financial planning profession I’ve watched the rapid transition from commission and transaction-based business models into fee models. Back in the 80’s and 90’s it was standard practice to buy and sell stocks and pay commissions to your broker based on the dollar value of your transaction. The same applied to other financial products which worked on a commission schedule. Nowadays, commissions tend to raise eyebrows, even in cases where the commission may be reasonable, hard-earned, or perhaps work out cheaper for the client in the long-run.
It doesn’t even matter so much what the fee model is. There are the true fee-only advisors (NAPFA folks) who believe fees should be charged by the hour, for the full year, or based on specific services such as creating financial plans. These people may earn less than other advisors but they rarely have a conflict of interest with their clients. In my conversations with financial planners the more common fee model, asset-based fees, also happens to be the more natural transition for traditional brokers who are being urged by their firms to convert from a commission model to a fee model.
In the asset-based fee model advisors slap an annual fee on a brokerage account typically ranging from 1 – 2% and the client never has to pay a commission for any stock or other product purchased inside. This system is marketable to clients because the fee received by the advisor is correlated to the performance of the account. It provides an incentive for the advisor to track progress and not simply become complacent after receiving a commission. In the sort of volatile trading environment we’ve been in for a while now it can help clients to receive ongoing advice without having to worry about paying fees for each phone call or meeting. Most services ranging from quarterly portfolio reviews to financial plans are typically included with the annual fee. This system is also good because it allows the planner to earn a living whereas fee-only planning often ‘undervalues’ a planner’s skill set.
So what inspired this post today? I’ve had lunch recently with several advisors who work at large brokerage firms and have been increasingly feeling pressure to endorse fee-models over taking large, up-front commissions. Compliance officers don’t want to deal with the headaches associated with back-end fees, lost liquidity, etc—they would rather promote compensation models which are seemingly better for both client and advisor. Overall I think these are good changes for the industry. I do find it unlikely the practice of commissions will be eliminated completely in the near future because insurance brokers, of which there are tons, still work in a deep-rooted commission system which would be tough to change.
Please e-mail me with any questions or comments.
Russell Bailyn
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Wealth Manager
Premier Financial Advisors, Inc.
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@premieradvisors.net
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.
Comments
Great article. Fee-based is the way to go... less conflicts of interest.
Posted by: Yalee Kahn | May 4, 2010 09:05 AM