Advisers held back by fee-based fears

Wirehouses outpace the rest of the industry in making the shift to charging fees

Jun 5, 2014 @ 1:51 pm

By Mason Braswell

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The tides have turned as the four large wirehouses, which traditionally trained advisers in commission-based brokerage business, now house some of the leading practitioners of fee-based business, according to a Pershing executive who spoke at the firm's annual conference this week.

Over the past decade, the number of fee-based advisers has increased to about 84% at the wirehouses, compared to about 57% across the rest of the industry, said Rebecca Chiccino, a director overseeing sales and organization at Pershing's managed investment platform, citing data from financial services research firm Cerulli Associates. Despite a growing opportunity, many advisers in other channels are held back by concerns about how to make the transition, how to market a fee-based practice and how to price their services, she said at Pershing's annual INSITE conference in Hollywood, Fla.

That's despite the fact that the market of clients who could benefit from a fee-based adviser relationship, in which clients are charged a portion of assets for advice, could be as large as 118 million households, or $27 trillion in investible assets, Ms. Chiccino said, again citing Cerulli data.

“There's many different reasons to make the leap,” she said. “It helps with consolidating assets and providing clients with ongoing support and guidance.”

OFFSETTING REVENUE

Three adviser panelists who transitioned a majority of their business to fee-based business addressed how they overcame their own reluctance.

One veteran adviser, Lewis Walker, president of Walker Capital Management Corp., said the toughest part was understanding how the fee-based revenue was going to offset a decline in commissions.

Some advisers charge between 0.75% and 1% of assets under management as an annual fee, compared to drawing commissions, which Mr. Walker said could be as high as 7.5% on mutual funds when he made the shift in the 1980s.

“Some planners were scared to death of doing that,” he said. “I took a hit financially for a time when I made the transition.”

Advisers who make the move have to be prepared to find revenue from different sources, or make the shift gradually until they can pick up additional revenue from insurance or other products, said Karen Lare, a senior vice president at Waddell & Reed Inc.

“Some advisers found the opportunity to do insurance business,” she said. “If you're doing more financial planning, then you can balance out the income after some time, or you can do it gradually so you don't see a huge decline.”

GETTING CLIENTS ON BOARD

It's not just their own transitions that advisers are worried about.

Marc Stein of North Ridge Securities Corp. was very concerned about whether his older, long-term clients would be on board.

“Anecdotally, the younger the client, the easier the transition,” he said. “I was hesitant to transition the long-term clients because I was scared and didn't want to lose them.”

Not all clients need to be in a fee-based account, and some may prefer commissions based on their trading activity or how much financial planning they need.

Over time, however, Mr. Stein and Mr. Walker agreed that the clients who did move felt they were getting improved service. Instead of spending time prospecting for sales to keep up numbers each month, Mr. Stein had a more stable, recurring source of revenue that freed up time to make calls and focus on existing clients, he said.

“By and large, even existing clients were happy with it,” Mr. Stein said. “They felt like they were getting a better level of service.”

Another benefit is that it gives the adviser a scapegoat if performance drops off in a client's account, Mr. Walker said.

“We can fire the money manager a long time before [the client] fires me,” he said.

PRICING AND MARKETING

The other challenge is finding an appropriate price for advice that is competitive with what others in the industry are charging. Although 1% seemed fair to Mr. Walker, it sounded higher than some of his competitors.

“I didn't want to be the only person charging three digits,” Mr. Walker said, referring to basis points.

He said it helped to highlight for clients what fees they were already paying on some mutual funds, some of which have their own management or marketing fees that can be greater than 1%, or what the adviser plans to charge on a separately managed account.

It is also important to be flexible depending on how much time the account will require and how many assets the client has, the panelists said.

“Explain to people what it really costs to be in a no-load mutual fund,” he said. “[Clients] think the expense ratio is the only cost.”

Firms should work to help advisers understand some of the benefits of tapping into a recurring revenue stream, Ms. Lare said. She acknowledged, however, that there inevitably would be a few holdouts.

“Some advisers will adapt, some won't,” she said. “A lot of times it's about helping them see what the success has been.”

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