Telling high-producing, independent reps that they are doing things all wrong, that in fact they should throw commissions out the window and take a significant pay cut-all in order to convert to a fee-based practice-isn't exactly an easy or perhaps a wise thing to do. And independent broker-dealers who have spent years touting the virtues of fee-based brokerage and planning know this. Their message, however tactfully packaged, has been drowned out by the noise of a decade of surging transactions, soaring stock prices and high payouts.

Fast forward to the harsh reality of 2001. A year and counting of this mean-spirited stock market has caused the fanfare of sales success to quiet significantly. In fact, brokerage executives across the country tell Financial Advisor that even the most commission-oriented reps are now beginning to see the virtues of marketing fee-based advisory relationships instead of their traditional fare of commission-based products.

And for that, executives have the wayward stock market to thank. "Sometimes it takes an economy like this to mobilize these reps," says M. Anthony Greene, chairman and chief executive officer of Raymond James Financial Services in Atlanta. The company saw its overall fee-based revenue jump to 38.4% last year, up from the 32% area in 1999. "That's pretty good, but we want it to hit the 50% mark and move to 60% in the next five to six years," Greene adds.

To fuel that growth, Raymond James rolled out a financial-advisors division and full-service platform for fee-only planners in January. So far, six fee-only planning shops have signed on, and Greene says he anticipates the number to increase as the firm ramps up a pro-motional campaign. "People really don't like change, but I think more reps think the time is right to change their business model to fees," he adds.

At LPL Financial Services in La Jolla, Calif., recurring revenues, which encompass fee business, trail commissions and level-load C shares, now account for 50% of all revenues. Ten years ago, during the last big downturn, recurring revenues accounted for 5% of the firm's total. "It gives reps more stability and a stronger base from which to increase their market share in the communities," says Jim Putnam, managing director of the firm.

In fact, executives across the board are reporting an increase in fee-based revenues. It's not surprising. The media, which has been trumpeting the benefits of fee-based advice and planning for years, have finally convinced a growing portion of the investing public that they shouldn't work any other way. Couple that with the cold, hard reality of clipped 2000 revenues and production levels. The dip in some broker-dealers' profits and the flattening payouts for many reps were even more pronounced, coming off record 1999 revenues. Fees and the type of recurring income stream they produce have finally begun to look much more attractive to a significant number of reps.

Jay Lewis, president of New York City-based Nathan & Lewis Securities, says fee-based business increased 50% at his firm in the past 24 months. "We'll continue to see a migration to fees," he predicts. "The migration we're seeing is from front-loaded mutual funds into wrap-fee programs using funds and individual securities."

Jack R. Handy, president and CEO of Financial Network Investors Corp. (FNIC) in Torrance, Calif., estimates that fees make up about 30% of the firm's business. "It's a side of the business we are encouraging, and we expect it to grow more and more," he says.

Longtime brokerage analyst Steve Pierson, managing director of Putnam Lovell Securities Inc., a New York City-based investment bank that specializes in financial services, notes brokerages and their reps haven't always embraced fees. Actually, Pierson says, the fee-based concept started in the financial-planning marketplace, migrated to the wirehouses and is now being picked up by independent broker-dealers.

"You'll see the movement continue," Pierson says. "After years of resisting, what will aid the pricing is the public perception that fees are good for them. There's also the understanding among higher-net-income folks, who want to believe their assets are growing, that fees are the way to ensure that."

There's long been a perception that fee business works best for the wealthy. Middle-class folks in major cities like Boston and Washington have been hard-pressed to find a fee-only advisor to work with. But brokerage executives say middle-income clients are no problem for many of their reps. "We're seeing clients with relatively small accounts looking for fees," says Lawrence Silver, director of marketing at Raymond James in St. Petersburg, Fla. "For clients looking for support, a fee-based program can be a better fit. But you have to ask: What is in the best interest of the client? What kind of account do they want?"

Of course, information technology is critical to independent broker-dealers' commitment and conversion to fees. From firms' and reps' perspective, technology makes it easier to price assets and services on a fee basis, Pierson says. It also creates a seamless and synchronistic offering of services to reps, and as importantly, to their clients.

To that end, SunAmerica Financial Network Inc. in Los Angeles plans to roll out a platform for advisors that will give them what president and CEO Kevin Hart calls "a fully integrated platform that allows them to create end-to-end solutions."

Similar to those offered by Charles Schwab, TD Waterhouse and Raymond James, the SunAmerica platform "starts with the client profile and risk assessment, then moves to an analysis of outside assets, portfolio execution, performance monitoring and statement generation," Hart adds. "We've seen a definitive shift in investors' interest in their choice of a fee-based relationship with reps, and we are responding."

To fulfill the needs of an array of investors and their pocketbooks, SunAmerica, which has six subsidiary broker-dealers, offers 14 different fee-based programs to its 9,000 advisors, ranging from financial planning and entry-level investor packages to high-end advisory and performance-based offerings.

Of course, fees aren't the only issue occupying brokerage executives' minds these days. Other pressing issues include: The hunt for more merger and acquisition opportunities, the cry for increasingly sophisticated products and services and the need to continually monitor and upgrade regulatory systems. There's also the recognition that competitive advantage at some point, not so far away, will be based on how investment offerings from reps and their broker-dealers actually perform.

On the consolidation front, all brokerage executives with whom we spoke agree that merger and acquisition activity will continue at a healthy pace in 2001. If the year's been slow so far, it's because some larger firms are "digesting" some of their more recent acquisitions.

The ING Group of Atlanta, which is owned by ING, the Netherlands-based investment bank, acquired FNIC as part of its purchase of certain Aetna operations, then bought Reliastar-both in the last two months of 2000. Today, ING Group controls a whopping eight broker-dealers and works with 10,500 registered reps. "Right now, we're in the process of digesting. We're consolidating systems and processes and streamlining operations, so we're not in the market right at this time, but there is potential for the future," says FNIC's Handy.

At SunAmerica, Hart says the firm's high-profile strategy of acquisitions will continue. "We believe we've been successful so far, and the reason this will continue is because the cost of doing business at a smaller firm is escalating," he explains. "You can justify the costs when spread across a 9,000-rep base, but not a 900-rep base." Of course, the reality of the marketplace is that there are few firms with 900 or 1,000 reps left to be acquired, which means SunAmerica will focus its acquisiton strategy now on those shops that have fewer than 1,000 reps onboard, Handy says.

With revenues falling off at the same time the need and cost for sophisticated information technology is escalating, some firms will have to pursue acquirers. The growing compliance requirements being placed on broker-dealers by their regulator, the National Association of Securities Dealers, will force the issue, Handy says. "Any one request of the NASD can be dealt with, but overall, the required package can be overwhelming for smaller firms," he adds.

Lewis says his firm, too, is in the market for businesses, but its interest is in New York Stock Exchange firms pinched by the fall-off in revenues. "Those who are bringing in under $100 million in revenues are seeking more and more technology assistance. Those costs, along with the pressure of the downturn, put more small- and mid-sized firms in a precarious position," he says.

Raymond James' Greene agrees that it is firm revenues and the services offered by clearing companies that will determine who stays independent and who seeks an acquirer or merger partner. "I would think you have to be in the $150 million to $200 million range to really afford to develop needed technology on your own," Greene says.

Pierson, who says he is working with a larger broker-dealer acquirer now, says ING, Raymond James and SunAmerica will all continue to be acquisition players. But he admonishes the industry not to forget the vast universe of suitors, which he says includes MetLife, Citicorp, First Union and Wells Fargo. "They're all interested firms," he adds.

One reason for doing a deal with a large suitor may be access to more sophisticated products. "When you look at who is doing the buying-the Pacific Lifes, INGs and SunAmericas-they are all product manufacturers," Pierson says.

Those three firms, each of which operates a network of broker-dealers, are all engaged in attempts to pull together their resources and roll out joint, marketing, technology and compliance arrangements across their networks, says John Poff, president and chief operating officer of Mutual Service Corp., Pacific Life's largest brokerage. "We're finally starting to get some real cost savings out of our investment in systems and technology" Poff says. "This is also improving our compliance."

The slowdown in revenues is intensifying the competition for top reps, with some firms offering transition money, promises of local support and, in a few cases, forgiveable loans. One reason is that the biggest reps are growing their top lines faster than the rest. At LPL, reps generating more than $300,000 in revenues saw their business grow 29% in 2000, while those earning more than $1 million saw their revenues climb 39%.

With some exceptions, brokerage executives say there is a growing interest in more sophisticated products. But while the notion of more esoteric fare like hedge funds (after all, they beat the market last year) and venture capital funds are all the rage in some circles, what investors are really asking for is individually managed portfolios, says Lewis. "People want professionally managed portfolios of individual securities."

Investors are also getting serious about estate planning and leaving some portion of their wealth to heirs, he adds. At Nathan & Lewis, that's prompted increasing interest in what Lewis calls "plan-completion insurance," which preserves and shelters assets in a life insurance policy so they can be passed on with the lowest possible tax liability.

Of course, what a firm offers, and to whom, depends on its reps' clientele. SunAmerica's Hart, for instance, says hedge and venture capital funds are for "a market we don't encourage or serve. Our client is part of the mass market across the U.S. They're members of the typical American household who have undersaved for retirement, as opposed to dealing with multimillionaires."

He's not alone. When asked about esoteric products, FNIC's Handy says bluntly: "Not our market."

But other firms are pursuing more sophisticated fare aggressively. To fulfill demand, Raymond James has just created a department devoted exclusively to product development for the wealthy. "We have more households with million-dollar net worth than ever before," says Silver. "It's the wealth-management department, and the focus is on creating products that work in a balanced portfolio. Balance is key."

The department grew out of client responses to a survey that asked them what products they were seeking. "What we heard was: 'We wish you had this or that.'" Silver adds. "We were lagging for a time in this area, but we're pushing forward now."

Eventually, the 100-million-strong investor class will demand from brokers even more information about investment performance, as well as additional tools to evaluate it. They'll want to know how they're doing on all levels at all times, rather than focusing on short-term results.

When that day comes, "he who gives the best advice at the best price will not only survive, but win," says Putnam Lovell's Pierson. "That type of competition will be one of the complications of personal financial planning in the years ahead."