Some advisors may be sold on the benefits of fee-based compensation, but they still have client retention concerns. But should they? Vanguard's Jason McIntyre takes up the question.
By Jason McIntyre
Financial advisors are bracing for change, expecting commission-based remuneration to increasingly give way to fee-based compensation.
And they expect this change to accelerate with the implementation of the Client Relationship Model reforms in Canada, themselves part of a global shift to fee-based investing.
In a recent Vanguard sponsored survey, 69 per cent of advisors said they were compensated by commission alone, whereas 21 per cent said they were fee-based only. However, these same advisors believe that their compensation structure is going to change over the next five to 10 years, with a shift away from commissions to fee-based.
We agree that the advice industry is changing and believe these changes are generally in the best interest of both clients and advisors.
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VIRTUES AND CHALLENGES OF FEE-BASED
From the client’s perspective, asset-based fees largely remove concern about potential conflicts of interest in the advisor’s recommendations.
From the advisor’s prospective, asset-based compensation can promote stronger client relationships and from a business standpoint more reliable revenue streams. The advisor can spend more time with clients, knowing that compensation does not depend on whether or not a transaction occurs.
There are challenges for advisors shifting to fee-based compensation. For example, some clients may perceive paying fees regardless of whether transactions occur as “money for nothing.”
However, this views the advisor’s value proposition through only one portion of the cost-benefit lens — his or her ability to outperform the market.
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A value proposition based on performance alone
puts an advisor at a disadvantage. Not only does success depend on factors outside the advisor’s control, such as the returns from individual securities or professionally managed funds, but the strategy also can promote a horse-race mentality among clients, leading them to depart if the promised out-performance does not materialize.
On the other hand, fee-based guidance changes the conversation, creating an incentive for advisors to demonstrate how they add value beyond performance.
Because compensation is more transparent, advisors can show how they add value as wealth managers, financial planners and behavioral coaches. In other words, the advisor is the alpha. As such, the advisor becomes an even more important factor in the client-advisor relationship, because the greatest obstacle to clients’ long-term investment success is likely themselves.
Depending on the structure and amount of charges, a transition to a fee-based practice may involve no change for clients, except that charges should become more transparent and potentially tax deductible.
And advisors’ needn’t expect a drop in revenue. In fact, they may see the opposite. Advisors who increased their assets in fee-based accounts by 25 per cent or more have seen revenue growth of 47 per cent over three years, more than double the average growth rate of 21 per cent.
That is compared to a revenue growth of 19 per cent for advisors who increased their assets in fee-based accounts by less than 5 per cent in the same period, according to research by data aggregator PriceMetrix Inc.
Financial advisors are bracing for change, expecting commission-based remuneration to increasingly give way to fee-based compensation.
And they expect this change to accelerate with the implementation of the Client Relationship Model reforms in Canada, themselves part of a global shift to fee-based investing.
In a recent Vanguard sponsored survey, 69 per cent of advisors said they were compensated by commission alone, whereas 21 per cent said they were fee-based only. However, these same advisors believe that their compensation structure is going to change over the next five to 10 years, with a shift away from commissions to fee-based.
We agree that the advice industry is changing and believe these changes are generally in the best interest of both clients and advisors.
#pb#
VIRTUES AND CHALLENGES OF FEE-BASED
From the client’s perspective, asset-based fees largely remove concern about potential conflicts of interest in the advisor’s recommendations.
From the advisor’s prospective, asset-based compensation can promote stronger client relationships and from a business standpoint more reliable revenue streams. The advisor can spend more time with clients, knowing that compensation does not depend on whether or not a transaction occurs.
There are challenges for advisors shifting to fee-based compensation. For example, some clients may perceive paying fees regardless of whether transactions occur as “money for nothing.”
However, this views the advisor’s value proposition through only one portion of the cost-benefit lens — his or her ability to outperform the market.
#pb#
A value proposition based on performance alone
puts an advisor at a disadvantage. Not only does success depend on factors outside the advisor’s control, such as the returns from individual securities or professionally managed funds, but the strategy also can promote a horse-race mentality among clients, leading them to depart if the promised out-performance does not materialize.
On the other hand, fee-based guidance changes the conversation, creating an incentive for advisors to demonstrate how they add value beyond performance.
Because compensation is more transparent, advisors can show how they add value as wealth managers, financial planners and behavioral coaches. In other words, the advisor is the alpha. As such, the advisor becomes an even more important factor in the client-advisor relationship, because the greatest obstacle to clients’ long-term investment success is likely themselves.
Depending on the structure and amount of charges, a transition to a fee-based practice may involve no change for clients, except that charges should become more transparent and potentially tax deductible.
And advisors’ needn’t expect a drop in revenue. In fact, they may see the opposite. Advisors who increased their assets in fee-based accounts by 25 per cent or more have seen revenue growth of 47 per cent over three years, more than double the average growth rate of 21 per cent.
That is compared to a revenue growth of 19 per cent for advisors who increased their assets in fee-based accounts by less than 5 per cent in the same period, according to research by data aggregator PriceMetrix Inc.
