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.