The financial services industry is changing rapidly, and firms must adapt if they’re to remain relevant and competitive. Shifting consumer preferences, increasing regulatory pressure and the fintech revolution, which is attracting new and formidable competitors, are combining to force firms like ours to rethink how we do business.
The staple of the broker-dealer branch firm model is recruiting, training and supporting advisors in building independent practices, and then living off the sales commission/grid payout margin they create for the firm. With margins rapidly narrowing and few economies of scale available from trying to help advisors market and compete effectively in disparate target markets, it has become clear that the old way of doing business is rapidly coming to an end.
With all this in mind, my firm, AspenCross Wealth Management, a fee-based financial advisory and investment management firm, fundamentally changed its business model in 2015. An integral part of this transformation was to do something many firms’ principals would consider unthinkable: changing advisor compensation from commission to salary. We offered our advisors a choice of becoming salaried employees or continue to build their practices.
Of course, working for a salary is anathema to many advisors, so some advisors ended up leaving. We quickly recruited replacements who were attracted to our salary-based advisor model. This model focuses on delivering unbiased, fee-based advice in a work environment that fosters openness, collaboration and intellectual honesty.
Since this shaking-out period, the change to salaries has been instrumental in differentiating our firm from competitors, attracting quality new advisors and helping address the potential conflicts of the commission-based model. This outdated model has these impacts on:
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Advisors: Many new advisors are attracted to the industry by the prospect of earning an unlimited income, the autonomy to build their own practices and an enticing vision of work-life balance. The reality is that about 80 percent of them fail after five years, according to Cerulli Associates. Many receive poor training, and most lack a sustainable process for gaining new clients (friends and family only go so far). Commission-based income often leads to a short-term focus and a treadmill-like existence.
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Clients: Independent advisors tend to make their own decisions regarding what’s best for their clients, from asset allocation to product selection. Unfortunately, their biases, training (or lack thereof) and experience can have a signficiant impact on their client solutions. Moreover, high advisor turnover often results in clients dealing with multiple advisors over time, leading to inconsistent advice. Clients may find themselves accumulating a disjointed array of insurance and investment products that have little or no link to any form of long-term plan or strategy. These clients may be ill-served by conflicts of interest, stemming from the current regulatory suitability standard, involving tiered grid compensation systems that reward advisors based on the amount and types of products they sell.
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Firms: High advisor turnover increases recruiting and training costs while decreasing client satisfaction and retention. The higher an advisor climbs on the payout grid, the less margin is available to the firm for training, marketing, technology and operations.