Over the last few years, we’ve seen an increasing number of advisors move away from a commission-based business model toward one more focused on the delivery of advice. This has happened for several reasons, but perhaps foremost among them was regulatory concerns surrounding the Department of Labor’s attempt to impose a fiduciary standard upon the industry.
Those efforts, of course, ended this summer, when a court decision officially vacated the rule. With this in mind, it’s a good time for firms and advisors to reconsider what business model gives them the best opportunity to serve investors most effectively. Here are some things to consider:
• Thoroughly profile your clients on a frequent basis, and document when you do so. As discussed, there is no question regulatory concerns were an impetus behind more and more advisors moving to an advisory model. However, the shifting demands of the marketplace were an equally significant factor. Investors, more and more, want holistic, goals-based financial planning solutions, and the prevailing wisdom is that the easiest way to do that is via a fee-based approach.
As this trend has intensified, many advisors have developed a strong bias for the advisory model, believing it’s the best and, in some instances, only way to serve clients. Advisors who take this view don’t have bad intentions. On the contrary, they merely have certain inclinations for how they want to run their business.
Still, with any transition to fee-based advisory work, allowing business considerations to take a backseat to client specific needs in certain ways defeats the purpose of such a transition. Yes, the “fee-only” route may work for most, but it won’t for others. The only way to know for sure is to profile clients—not just once at the outset of every engagement, but repeatedly. Because a client’s goals, objectives and risk profile will change with time, the type of solutions they need could as well.
• If you are sticking with, or upsizing, your commissionable business, beware of leading with products. Though many practices have become doctrinaire advisory absolutists, others have started to embrace commission-based business once again in the wake of the DOL’s stalled effort to implement a fiduciary standard. But the reality is that advisor-client dynamics have fundamentally changed. Any client engagement that takes a product-centric approach too far ignores both the SEC’s ongoing attempt to revamp advice standards for the broader industry (not just retirement accounts) as well as the generally charged political environment, which could cause further regulatory upheaval in the coming years.
It’s very clear where the industry is heading: a regulatory and market landscape that demands a different advisor-client relationship. For example, while the current bull market continues to trudge along, there’s no question that we have been experiencing more frequent bouts of volatility. Based on this, many investors would almost certainly be better served by a more active, advice-based relationship with their advisor to insulate themselves from possible instability. Therefore, because commission products are incompatible with open-ended trading, advisors who take that approach too far could have a difficult time serving their clients.
• Recognize what types of commissionable business can—and should—remain a part of the client-service model. Without a doubt, most clients continue to have an acute need for commissionable products, whether it’s insurance, fixed-income vehicles or, in some cases, alternative investments. These products deliver a solution set that is difficult, if not impossible, to replicate in a fee-based advisory context.
When considering how to best employ a commission or fee-based approach, it’s critical for advisors to have access to tools and resources that will support them through this thought process, either within their own practice or through a broker-dealer. These resources include CRM systems that can create a record of client conversations and archive the content, as well as provide alerts when a client is due for a quarterly review or when an advisory client hasn’t engaged in any trading activity for an extended period.
As changes to the regulatory landscape take a pause (however momentary), everyone in the industry has opportunity to re-imagine the balance between commissionable and fee-based business—and to get it right, once and for all.