These days, Dave Graffagnino sees himself as a dinosaur.
In a world where more advisors are shifting their compensation to fees, Graffagnino, manager for WS Griffith's office in Daytona Beach, Fla., is very comfortable being paid by clients through commissions. Although some advisors in his office now make most of their money by charging fees, 80% of Graffagnino's business remains commission-based.
"I started in the business in the 1970s, and at that time, there was no fee-based business," he says. "A lot of my clients are still very long-term, and they were comfortable and I was comfortable with the business we developed on a commission basis. They and I got to a point where we were reluctant to change."
Most of Graffagnino's clients are individuals who understand how the market works and want to own individual stocks. And for his bigger clients with multimillion-dollar accounts, he says, putting them on a fee basis would cost them far more than what they pay in commissions.
"One thing I've found having grown up in the business and picking individual stocks is that the industry has gone away from that. Although people look on my way as being a dinosaur, it actually attracts people who want that kind of service," he says. "I enjoy that, and I fully intend to keep on doing it."
In reality, Graffagnino's ways are far from extinct. Commissions still represent the lion's share of registered reps' revenue. But that share has declined significantly in the last five years, and is expected to continue falling. According to the Securities Industry Association, fee-based products accounted for a fifth of registered reps' total gross commissions and fees in 2000, compared with about 7.5% in 1996.
Just about every major broker-dealer in the country now offers at least some fee-based financial planning services, and most are rushing to offer more. Independent investment-advisory firms also are adding to their fee-service menu. Reasons for the trend vary, but a major one is that fee services tend to generate more revenue because they attract clients with bigger accounts. Also, fees based on a percentage of assets under management usually provide a more predictable, steady flow of income for firms.
SunAmerica Financial Network, which includes nine broker-dealers with more than 13,000 independent financial advisors, is one of the many firms adding more fee-based services. It's also introducing a new advisory services platform to make it easier to manage higher-net-worth clients, who demand sophisticated fee-based services, says Russ Phillips, SunAmerica Financial Network's chief marketing officer. A recent study by Tiburon Strategic Advisors, "A Comprehensive Review of the Best Practices of Independent Reps," was based on the experience of SunAmerica reps and found the practices that focus on larger clients have higher revenue.
"One of the conclusions ... from the data is that our reps don't need more clients, they need bigger clients because the number of relationships that a rep can manage is finite," Phillips says.
Other advisors are moving in the same direction. Jeffrey Scott, managing director of Sagemark Consulting of the Mid-Atlantic, based in Tysons Corner, Va., says the firm has moved more toward fees and now derives about half of its income from them. With investment management, 85% of Sagemark's revenue comes from fees. "We really feel clients like the objectivity of paying a fee, and we know we can cover our overhead," he says.
Scott adds that the firm focuses on high-net-worth families-its average client is about 54, has household income of $277,000 and a net worth of a little more than $5.2 million. "They really want wisdom, advice, and for us to hire and select money managers and develop goals and objectives," Scott says.
Stephen Tobe, president of Pittsburgh-based Signature Financial Planning, which is affiliated with Commonwealth Financial Network, is trying to find the right balance between his fee and commission business. Two years ago, his business was 100% commission-based. Now, it's 50% commissions, 50% fees, and he expects to have shifted most his business to fees in another five years. "I see the whole industry going toward fee-based," he says, because that model "puts you on the same page as the client" and provides a better opportunity to make money. "The difficult thing is as you transform to fee-based is having enough cash flow to run the business. With commissions, you're used to big hits up front. You have to find a balance," he says.
Still, he adds, fee business isn't for everyone, especially for planners who want to concentrate more on clients with smaller accounts. "It really isn't cost-effective for the client or planner to put $150,000 into a fee-based program," he says.
Sharon A.C. Kayfetz, CFP, RFC and owner/vice president of Personal Financial Consultants in San Ramon, Calif., stresses she thinks it's important for advisors to offer a full menu of services with different payment options so clients can choose the alternatives with which they feel comfortable. At least 50% percent of the firm's clients pay for services through commissions, and the rest, through fees.
The long-running controversy over which are better, fees or commissions, hurts the industry, she adds. "We should be happy with what we do. As long as it's ethical, we can all get along," says Kayfetz.
Other advisors wholeheartedly agree that fee products aren't for all clients. Although some advisors have enjoyed success serving the middle market with hourly fees, many others say commissions work well and their less-affluent clients prefer them. "It's always driven by which is the most economical and appropriate for the client," says Bob Fragasso, president and owner of the Fragasso Group, an independent, registered investment advisory firm in Pittsburgh and an LPL affiliate. About 45% of the firm's revenues come from fees and 55% from commissions on mutual fund, insurance and annuity transactions.
With accounts that are greater than $500,000, fees result in lower charges for clients, he says, but for smaller accounts, commissions make more sense. He adds the firm won't manage individual-stock portfolios on a commission basis because he believes there's an inherent conflict. "Think about it from the client's point of view. Every time I give advice to the client, it is going to generate a commission," he says.
Fragasso stresses all clients get the same level of service, whether they are commission or fee customers. "It's unfair to take in small accounts and never service them," he says. "If someone paid a commission up front, they still have a right to the same quality of service. That's the right thing to do, and that's the right business thing to do."
He adds the firm has no minimums, and it never will. For a smaller, boutique firm, it might make sense to give away small, commission-based accounts and focus on larger clients. But Fragasso says his practice, which includes 30 employees and operates two offices, prefers to grow smaller accounts into bigger ones so that his employees have a customer base they can count on in the future.
"I guess the most important thing is there is no perfect way. Some situations work a little better with a commission arrangement, and some work better with fees," says Phillip Cook, a CFP licensee, registered rep and owner of the Torrance, Calif.-based Cook and Associates. Cook says the income of his firm, which is affiliated with the broker-dealer Financial Network Investment Corp., comes 48% from commissions, 50% from fees and 2% from hourly charges.
Still, the move by brokerages to managed accounts, which usually come with fees, may be good for the brokerage industry, but may not be as good for clients, he continues. "Because what it's done, in effect, is annuitize my business. It is probably the worst thing from a client standpoint. The managed-account arrangement is more expensive, not initially, but ultimately," Cook says. He believes clients who bought mutual funds from him 20 years ago on a commission basis and held the investments most likely netted more than if they had bought the same investments but were charged ongoing fees.
Although many advisors are incorporating fees into their charges, some don't expect to be doing much business that way.
Harvey Koenig, owner of Koenig and Selzer Asset Management Group in Manlius, N.Y., says he's thought about moving the firm, which derives 90% of its income from commissions, into more fee business, but has hesitated. "We don't have a lot of very high-net-worth clients that fees make more sense for. We work with clients originally in the employee-benefits arena, and then get involved in family financial planning," says Koenig.
A major focus of the firm, an affiliate of Syracuse, N.Y., broker-dealer Cadaret Grant, is 401(k) and 403(b) business, and it handles such programs for many companies in its area. Koenig and Selzer gets paid commissions when new participants sign up for the plans, which usually offer B-share mutual funds that eventually become A shares. The employee-benefits business provides a somewhat more steady, predictable flow of income than other types of commission sales, but a lot of service is involved in setting up and maintaining the programs, and some advisors don't want to get involved in all that, Koenig says.
Allen Arntzen, principal of Sundial Consulting Group in Largo, Fla., gets all his income from commissions. He describes himself as a "mom-and-pop planner," someone who caters to middle-income couples who have worked hard all their lives. He says he always explains choices openly and honestly, and most of his clients end up choosing commissions. Arntzen adds he doesn't base his recommendations on which products generate the highest charges. "I am independent. I am not married to any company. I find the best product and service for my clients," says Arntzen, a retired policeman who began selling insurance 22 years ago while he was still on the force. In the late 1980s, he earned a CFP and diversified his practice. He became a full-time planner in 1996.
Daniel Zuckerman, a CFP licensee and registered rep with First Global Securities in Pasadena, Calif., says commissions probably account for 90% of his business, and unlike many advisors, he thinks they are the best choice for most clients and result in decisions that produce the best stream of cash flow. "I believe all wealth is created by action, or more specifically, transactions. While advice is nice, until you move from the metaphysical to the physical reality, you haven't made any money. You've simply informed and entertained" clients, he explains. "An asset-based planner does not have to be as proactive, or even as decisive, in his or her actions. As long as they keep assets under management, they will be paid, but where does that leave the client?" says Zuckerman, a professional violinist who worked in mortgage banking before becoming a rep three years ago. His clients mainly work in the entertainment business.
Like Zuckerman, many advisors have built successful practices charging commissions and believe they are the right choice for many clients. But there's no doubt more advisors than ever are converting more of their compensation to fees. Just how far the pendulum will swing, however, still is anybody's guess.