Many advisors find that switching is worth the pain.
In a recent Webcast event dubbed the Strategy Forum, Cerulli Associates Inc., the Boston-based research and consulting firm, demonstrated that fee-based brokerage activities accounted for $32 billion of revenues in 1998. By 2001, that number had risen to $157 billion. The movement from commissions to fees is undeniable.
Yet, on a micro level, the individual broker or planner sees the journey as full of uncertainty, at best, and downright hazardous, at worst. Len Reinhart, chairman of Lockwood Financial Group in Malvern, Pa., has been an influential participant in the brokerage industry since his days at E.F. Hutton in the late 1970s. According to Reinhart, "The first [brokers] who made that transition to fees went through a big education and training process. Typically, they'd first take a cut in pay for one-and-a-half to two years until they'd built up assets on the fee side, and then they'd grow to greater levels of income than transaction producers were capable of. These guys can now take vacations and even sell their businesses if they want to."
Ross Marino, an advisor affiliated with Raymond James, can attest to the truth in Reinhart's characterization of the conversion process. "I was a traditional broker collecting upfront commissions who wanted to move to the fee-based model. I estimated I'd have about a 70% drop in income, and that turned out to be pretty accurate for the first few quarters. Twelve months after I switched, my revenues were picking up," says Marino. Altogether, it took Marino two-and-a-half years to get back to his previous level of income, but he's now zealous in the encouragement he gives to other commission-based planners to make the switch.
Other hazards await those who would contemplate conversion. Marino found out that not only did he lose some clients who didn't like his new fee structure, but he lost some very aggressive investors, too. As a broker, he could indulge risk-tolerant clients, but as a fee-based planner taking a more comprehensive approach, he rejects radical investment allocations in favor of diversification and risk management. As a result, some of his high flyers flew the coop.
Those who leave the brokerage industry altogether to adopt a fee-only business model should anticipate even more uncertainty. Tom Posey, now the head of Posey Capital Management Inc. in Houston, worked in a brokerage environment for two years before deciding to start his own fee-only company. "It is indeed rough. I had some dead time, too, because after I left my broker-dealer I applied for my RIA and that took a while, during which time I couldn't do business at all. Since then, I've started transferring clients over, and getting some more revenues," says Posey.
Do his clients question the change in status? Doesn't it imply that perhaps he wasn't acting in their best interest prior to his conversion? "Clients have reacted very well to my fee-only status," says Posey. "Smart clients, at least, realize that it means I don't have a conflict of interest, and that's important to them." It would seem clients have the ability to separate the advisor from the environment in which he works. They will often stay with an advisor they believe has made recommendations in their best interest, whether he laterals to a different broker-dealer or converts to an independent RIA.
Yet, the success stories of advisors like Marino and Posey aren't enough to motivate some planners who fret endlessly about the possible loss of clients, the certain loss of trail commissions (if relinquishing licenses for a fee-only practice), and the heavy administrative burden of transferring clients if the planner leaves the broker-dealer world. It often takes a strong conviction by the advisor that she needs to make the change to feel better about herself and her work in order to overcome any fears she might have that her income will suffer.
As Posey puts it, "I think the most important factor when deciding which way to go is, how do you feel as a planner working on commission?" Not very good, decided Judi Martindale, who worked in a broker-dealer environment for 13 years and then left with no clients. If that sounds like a dire situation, Martindale didn't think so. Her philosophy is, "When you believe in what you're doing, and you have the practical skills to make the change, everything will fall into place."
And Martindale proved it. Eager to be fee-only and join NAPFA, she says she had no trouble picking up clients. "I was on the Worth list, which helped. And I got so many new people as a result of being fee-only, I matched my revenue one year after ending my commission practice." Wouldn't it have been easier if she'd retained her clients? "I'd put them all in American Funds, and I didn't feel it was right to pull them out," she says. Nor could she keep them as a NAPFA member since the trails would have voided her eligibility. Martindale, now the owner of Martindale & Associates in San Luis Obispo, Calif., didn't actually walk away from the revenues those clients represented, though. "I sold [the clients] to commission people I knew in my area."
Those lacking Martindale's confidence can have their hands held through the conversion to independent RIA status by a number of advisor networks that give direction to new fee-only planners. One network is Cambridge Advisors LLC (www.cambridgeadvisors.com/adv/index.html), which currently has more than 60 advisors in 22 states, and helped Ted Roman make the conversion to his own firm, Roman Financial Advisors of San Diego, Calif. Like a lot of brokers who are planners at heart and stuck in firms that don't encourage planning, Roman was doing a lot of planning for clients and not getting paid for it. "Finally, I just got tired of it. Although I'd been at it for 20 years, it simply didn't t fit my personality. I saw an article on Cambridge Advisors, met with its founder, Bert Whitehead, and signed up."