Hybrid advisors work in both the fee-based and commission worlds.
The brokerage industry's transition from a
commission to a fee-based services model has created a ripple effect
that is impacting clients, advisors, broker-dealers and the myriad of
entities that serve them. As a result, all sorts of service providers
on the periphery are entering the custodial arena to capitalize on new
groups of advisors and brokers who are emerging as the retail financial
services industry transforms itself.
One such group is the advisor who lies somewhere in
between the realm of commissions and fee-based services: what one
recent report called the "hybrid" advisor who utilizes both fee
structures. Sometimes the mix of fee models is temporary, serving as a
bridge to the ultimate goal of being a practice that is driven 100% by
fee revenues. In some cases, however, the mix of fees and commissions
is the model an advisor settles on.
In either case, observers say, such advisors may
have the most demands in terms of compliance issues, technology needs,
operating overhead and client management. "The overall industry trend
towards a fee-based model, or a financial planning model, is certainly
a big one," says Tom Watson, an analyst with Forrester Research, a
management consulting firm in Cambridge, Mass. "What you have is a lot
of transaction-based advisors moving toward fee-based and are somewhere
in between."
In a recent report that studies the technology needs
of advisors across both fee structures, Forrester Research referred to
such advisors as "hybrids." In its report, it found that out of 361
financial advisors surveyed at four large U.S. brokerages, about 60%
generated revenue from both fee-based advising and commission-based
trades.
Solely commission-based advisors made up only 15% of the group, and fee-based made up of about 25%.
Forrester cautions that the breakdown shouldn't be
taken as a representation of the entire brokerage industry, but
Watson says it does reflect an immediate reality: Transaction-based
models are being phased out and many advisors have at least partially
made the transition to fee-based models. "In 20 years, I don't think
anybody will be 100% commission on the retail side," he says.
At LPL Financial Services, for example, fee-based
revenues grew by 50% last year to $31 billion, says Bill Morrisey, the
company's senior vice president for advisory sales. Fee-based revenues
now make up 40% of the firm's overall sales.
Morrisey adds that while LPL's platforms don't cater
to a combining of fees and commissions in the same account structure,
"Most of our advisors have a combination of platforms with their
clients."
Keith Newcomb, a financial planner with Full Life
Financial LLC in Nashville, Tenn., can be put in the "hybrid" category.
A former investment broker, Newcomb decided to make a transition after
his regional firm was bought in 2000. "I was an investment broker with
the heart of an investment advisor and financial planner," he says.
Newcomb knows about the tensions that exist between
the commission and fee-based camps, and the debate about whether
commission-based advisors can truly serve their client's best
interests. During his own transition process, however, Newcomb felt
that to provide his clients with the best service and value, he needed
to continue working with some commission-based products. "It was
difficult to find commission-less products that were best in breed for
all the solutions that needed to be constructed for clients," he says.
The disparity in choices between commission and
fee-based products was most apparent in the insurance area, he says.
"When comparing commission products to so called no-load products, I
did not find them to be more competitive at the client level and as a
result was often left choosing a commission product to meet insurance
needs," he says.
The same, he says, holds true for limited
partnerships such as privately traded REITs, products for which it is
hard for an advisor to add enough value to justify charging a client an
asset-based management fee. "It's more cost effective for the client to
pay the commission rather than the ongoing fee," Newcomb says.
Still, the majority of Newcomb's practice is derived
from fees. He charges hourly rates for planning services and an
asset-based fee for portfolio management, reporting and reviews. "Any
commissions, any products that involve a commission or other
compensation, such as a mortgage or annuity, are fully disclosed to the
penny," he says.
Newcomb, in fact, feels the mix of commissions and
fees better services clients on the regulatory front. Since he's
required to comply with both NASD and RIA regulations, Newcomb says he
has to "default to the highest best practice in all ways to all
clients."
David Levine, senior vice president at GunnAllen
Financial, feels that despite the powerful trend toward fee-based
services, many advisors are steering away from a fee-only
model-primarily because fees are not a one-size-fits-all option.
"There's been a trend away, in some cases, from the fee-only model," he
says. "I think certain advisors are finding that equities tend to be
managed more on a fee basis," he says.
With the population aging, and an increasing number
of clients seeking a fixed-income account solution, asset management
fees amount to overkill, Levine says. "What should drive things is
what's right for the client," he says. "The more sophisticated advisors
are finding that equities are efficiently managed with fees and bonds
are managed efficiently in a more buy-and-hold approach," he says.
Industry observers say that, aside from a desire to
make gradual transitions or use a "best-of-both-worlds" approach,
advisors may be using a mix of fees and commission out of a sense of
caution. There is still a hesitance among transaction-based
practitioners to charge their clients fees, they say.
Michael Harkin, marketing director for Princor RIA
in Des Moines, Iowa, notes that about 70% of his broker-dealer's reps
only charge a fee for a financial plan when they think it's
appropriate-not as a standard operating practice. "In many cases,
they're in a position to charge for it, and they don't," he says. The
same holds true for plan reviews, he adds.
Harkin says it comes down to making advisors realize
that the advice they provide clients, and the years of experience to
back it up, do have value. "The message is, we're not asking you to get
paid for anything but your work," he says.
Another issue that makes advisors wary is the
increase in paperwork that comes with a financial planning component,
including a five-day wait on having financial plans approved by the
broker-dealer. "I would guess that more than 50% of the cases we
do come in at the last minute with the advisor saying, 'I really don't
have five days,'" Harkin says.
On the broker-dealer side, he adds, the push toward
fee-based services is seen as a long-term benefit that will lead to
more comprehensive, longer-lasting relationships with clients. That's
why Princor's goal is to double the number of reps doing financial
planning activities this year, Harkin says. "We really don't expect
this area to be incredibly profitable" over the short term, he adds.
One group that is trying to keep up with
transitioning advisors is technology providers. Charlie Davidson, vice
president of strategy and business development at Financial Profiles,
says all advisors are looking for an integrated software solution. With
"hybrid" advisors, the integration becomes even more complex, he says.
"This is very much an issue that is still in flux," Davidson says of
the industry's transition to fee-based services.
There are multiple issues involved in transitions to
fee-based structures, and technology is one of the crossroads where
they all meet, he notes. Regulatory compliance, costs, training and
productivity are among the factors companies take into consideration
when making a change.
Davidson has even seen a case of a large
organization reducing its number of fee-based advisors because of
difficulties in making the transition. With the trend toward fee-based
business in mind, Financial Profiles has tried to offer software
solutions that are both scalable and flexible, he says.
As an example, he notes that commission-based
advisors typically do not need analysis tools as in-depth as those that
might be needed by a fee-based advisor. "A lot of times that decision
is based on the net worth of the client," Davidson says. "As you go up
on net worth, it gets more complex and becomes a fee-based case."
The company's Forecaster product, launched in 2002,
is aimed at the commission-based advisor, while the more in-depth
Professional product is designed for advisors-both fee-based and
hybrids-who want more comprehensive tools, he says.
One key feature of both products is that their
underlying data can be migrated from one product to the other, he says.
"The underlying calculation engine is the same for both products,"
Davidson says.