Relatively few brokers are increasing their commitment to fee-based advisory practices, a new report indicates.
Citing data from several surveys, Boston-based Cerulli Associates determined that commission-based payouts still account for between 60 percent and 80 percent of financial advisory revenue. The finding is somewhat surprising, given the industry’s increasing appetite for fee-based revenues and constant banging of the table that brokers should transition themselves to a model based on asset management fees.
Financial advisors with experience in the fee-based area have an explanation: the down market is hindering many advisors who want to make the transition. "If you’re an existing commissionable broker, it’s a tough challenge to transition," says Mark Balasa, president of Balasa Dinverno Foltz & Hoffman, an independent fee-only wealth management firm in Schaumberg, Ill.
He notes that if commissions are suffering, advisors have less money to help them through the inevitable dip in compensation that accompanies most transitions to fee-based services. Cerulli estimates that advisors making the transition take "about a 75 percent haircut on year-one compensation." (This finding is based on a hypothetical model comparing fee-based and commission-based compensation packages.) "In a down market, it can take seven years to get predominantly fee-based," says Dennis Gallant, a director at Cerulli.
Determining how much of the industry has embraced the fee-based model is not an easy matter, Gallant says. Firms hesitate to offer specifics about their transitions, instead focusing on how much of their revenue is recurring, which includes mutual fund wrap programs and sales of "C" shares, which have trailing commissions but yet may not necessarily qualify as an asset-based revenue model for the individual broker. "We think [fee-based] penetration is overrated and overestimated at this point," he says.
According to the Cerulli report, what growth has occurred thus far is attributable to the efforts of "self-motivated advisors embracing the concept," rather than to the firms themselves.
Some view the fee-based model as a threat to brokers. Gerry Burchard of Round Hill Securities in Alamo, Calif., believes that the management control brokers cede in a fee-based model undermines the broker/client relationship. "You’ve made yourself less important in the equation," says Burchard. "If you leave the firm someday, why are your clients going to want to leave with you?" Despite this, 80 percent of brokers responding to a Cerulli survey indicated they planned to increase their fee-based revenues over the next twelve months.
Evidence suggests that brokers who make it through the initial phases are rewarded down the line. According to Cerulli, advisors who have converted 40 percent of their book to fee-based business (typically over a period of 3 to 5 years) generally double that level of fee-based business in the following year.