Earlier this year Omaha, Nebraska-based CLS Investments published a white paper on the benefits of switching to a fee-based model. The stats reported in the paper show that as of year-end 2014 and for the first time, fees exceeded commissions (46 percent versus 45 percent, respectively) as
components of advisors’ revenues. Only 11 percent of the survey respondents were
commission-only; the remainder were either fee-only ( 23 percent) or using a mix of
fees and commissions in varying degrees (66 percent).
“The upcoming Department of Labor fiduciary ruling is likely to accelerate the
switch to fees,” says Gabriel Garcia, head of relationship management at Pershing
Advisor Solutions in Jersey City, New Jersey. “Whether you’re a registered
representative or a hybrid or a dually registered [advisor], you’re going to be faced
with having to deal with the DOL proposal in some way, shape or form. Most likely
it will be addressed not through the BIC [best interest contract] exemption but
through some sort of leveled compensation, fee-based advisory services, if you will.”
John Anderson, head of practice management solutions, SEI Advisor Network
in Oaks, Pennsylvania, also sees the DOL ruling as an impetus for the shift to fees.
Additionally, he maintains, existing compensation models overall are evolving. “I
think we’re kind of at that crossroads right now or, frankly, within the next couple
of years, where advisors are going to be pressured by their clients to justify why
you’re getting a commission for selling a product versus what I’m really looking for,
which is advice,” he says.
Changing your business model entails risks, though, even if you’re adapting to
major industry trends. If your transition plan is sound, the move can pay off for
clients and you. But if you plan inadequately, you risk ruining a good business and
setting yourself back for years. We asked several experts and advisors for their
insights on making a successful transition.
By Ed McCarthy, CFP, RICP