Low rates pressure financial adviser income
The Federal Reserve's commitment to keep interest rates at record low levels may be helping the economy, but…
The Federal Reserve's commitment to keep interest rates at record low levels may be helping the economy, but it is wreaking havoc on financial adviser compensation.
“In this environment, advisers have to work a lot harder,” said Dennis Gallant, founder of Gallant Distribution Consulting.
“They're looking at other solutions and trying to justify value. But if the solutions don't pan out, it's going to be harder to say that they've tried everything but still haven't provided the client with additional value,” Mr. Gallant said.
PITCHING ADVISERS’ VALUE
With returns so low on most fixed-income investments and with volatility scaring many clients away from equities, securities transactions — and commission revenue — have declined, industry observers said. At the same time, lower returns are putting adviser fees in an unflattering light.
To make a case for their value, many advisers are focusing more on estate and financial planning, retirement planning and insurance products.
Some, according to Mr. Gallant, whose firm recently polled 377 advisers on the subject, are even forgoing fee income on fixed-income investments.
“That may be an area of concern for registered investment advisers if they use a lot of fixed income in the portfolio,” said Mr. Gallant, noting that more than 70% of the advisers polled said that they have increased their use of dividend-paying equities.
Indexed annuities, a profitable product for many advisers in recent years, have been particularly hard-hit by current interest rate and market trends, as carriers have pulled back on generous crediting and commissions as a result of skimpy returns on their own bond portfolios.
“Commissions [on indexed annuities] have been reduced over the past four years and agents don't have the products they were once able to sell, so it's been harder to sell,” said Sheryl Moore, president of Moore Market Intelligence. “How do you say to the client that you have this great safe- money solution?”
To that point, 85% of advisers said that low rates have affected their ability to help generate retirement income for clients, and 79% said that their ability to help those clients is at least moderately affected by market volatility, according to Mr. Gallant's poll.
In response to market forces, advisers at Commonwealth Financial Network have been segmenting their services, distinguishing charges for investment management from fees for financial planning services, according to Greg Gohr, director of advisory marketing.
This way, clients understand that they aren't paying solely for performance but for services rendered.
“If I'm charging you a 1% management fee, I can pinpoint the six or seven services that are included in that, and if you want other services, then that's under a financial planning fee — like an annual retainer fee,” explained Mr. Gohr, who said his firm's financial planning revenue is up about 37% since 2008, reflecting how advisers are differentiating their fees.
The other benefit of breaking out services is that when markets plunge, the adviser can continue collecting fees from other services he or she provides.
“There's this diversification of revenue so that if the market is down 20% on my managed assets and I'm charging retainer or planning fees, then I'm still working and getting paid,” Mr. Gohr said.
REGULAR COMMUNICATION
Although revenue at Counsel Financial Inc. still is tied to assets under management, adviser Kevin Distad noted that the firm's renewed emphasis on retirement income planning and other planning services requires regular client communication — which reinforces the value of the relationship.
“Performance is only part of the value proposition,” he said. “The true value proposition and most precious asset is the client's time, which is limited.”
Advisors Financial Group LLC finds that regular client contact helps unearth gaps in insurance coverage, which the firm is eager to fill.
“We've gone back and looked for opportunities that have been put aside for a while, such as life insurance and long-term-care coverage,” said Steven A. Plewes, a principal of the firm, who noted that traditional insurance products pay upfront commissions, which helps advisers “get over the hump” in terms of cash flow when fee revenue is under pressure.
“We're not trying to sell everyone life insurance, but implementation [of a financial plan] can result in a sale of a product or management services,” he said.
Indeed, nonregistered agents who specialize in fixed annuities, disability and long-term-care insurance are brushing up on life insurance to diversify their revenue sources.
“One of the biggest things we've been seeing for nonregistered people is that they're expanding their practice and learning about life insurance, which can supplement their income,” Ms. Moore said.
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