How's business these days? If you're like most planners, fee-only, commission-based, or dabbling in both, the bad news is that your revenues from existing clients have declined concurrently with the value of their portfolios. But the good news is that most advisors are seeing a rush of new business, either from do-it-yourself investors who've turned tail or through increased referrals. "I've probably booked in the neighborhood of six to eight million dollars in new business in the last quarter," says Loren Kayfetz, a commission planner in San Ramon, California. Like many planners, Kayfetz says he preached conservative investing and asset allocation to his clients during the roaring tech-stock days. Now that tech has retreated, his "clients are more satisfied than ever before."
Indeed, an informal Investment Advisor poll of both fee- and commission-based planners found that only a few fee advisors have squabbled with disgruntled clients over what they're charging. And both advisors and industry executives agreed that advisors who've sold their clients on a comprehensive relationship, as opposed to one based solely on portfolio performance, will weather the market downturn unscathed. The majority of planners have been practicing the former, and most claim that fee-only planners' array of services should justify their costs in down markets. Most planners also insist they don't take on clients who are looking for short-term gains.
After the market shock, advisors say their biggest challenges are restoring investors' confidence, solidifying the advisor-client bond, and providing as much information as possible. They are also telling clients to tune out the market hype they see and hear on CNBC and CNN. "Turn off the TV and go live your life," is the advice that Diane MacPhee, a fee-only planner with DMAC Financial Services in Glen Rock, New Jersey, is dishing out to her clients of late.
One of the trouble spots for commission advisors is active traders' dampened enthusiasm for buying and selling. One commission planner, who's gradually shifting over to fees, noted that his fee business is insulating his practice from a decline in revenues. But another advisor who relies on fees and commissions says the market has "eradicated" some of his assets under management. That has meant less in fees.
In this market environment, repairing a client relationship that had been neglected, or was never cemented from the outset, should be a high priority for advisors. "Trust is a very difficult thing to recapture," says Kathleen Gurney, founder and CEO of Financial Psychology Corp. in Sonoma, California, which provides advice and continuing education courses to planners. "I'm not surprised [advisors] are getting more calls in this market. People want answers," she says. "Advisors have to have an understanding of the client's objective reality" about their investing decisions.
Chip Roame, managing principal of Tiburon Strategic Advisors, a research firm in Tiburon, California, says most investors remain in a constant state of dissatisfaction during down times. "Investors will never be happy with their [investing] model," he says. "Investors live in a very absolute world, not in a relative world. That's important for advisors to understand and for the whole industry to
|To Fee or Not to Fee?|
Just how many commission advisors are shifting to fees these days? How many advisors still get commissions? Last May we noted that a 1999 CFP Board survey found that two-thirds of CFPs are still compensated through commissions. The Board didn't conduct a survey in 2000, but it's likely those numbers haven't budged much. Diane MacPhee, a fee-only planner with DMAC Financial Services in Glen Rock, New Jersey, says the transition to fees has been slow over the last few years, and the current market atmosphere isn't prompting more converts. "I don't see why [commission advisors] are not transitioning to fees. People [may be] afraid of losing renewal commissions." |
There is mounting pressure on commissions from one front--wirehouses. Mitch Vigeveno, president of Turning Point, Inc., in Clearwater, Florida, a broker/dealer recruiting firm, says most wirehouses are now warning brokers that they won't get paid on trades that fall below a certain dollar amount. "One wirehouse is saying that if [a trade] is not $100, you're not going to get paid." Moreover, he adds, these firms are trying to weed out investors with less than six-figure wealth.
But Chip Roame, managing principal of Tiburon Strategic Advisors in Tiburon, California, says there is "always a debate that if we went into a sustained bear market period--which we are heading for--will the fee business contract?" He argues that most advisors are having "good success" now, and that "there is no one model that is better in a bear market. You will see a little turnover in all of them because consumers will always have the mentality that the grass is greener somewhere else."
"There is a place for fee and commission advisors," agrees David Diesslin, a fee-only planner with Diesslin & Associates in Forth Worth, Texas. He says the demise of the commission business is greatly exaggerated. "I don't know that you will ever get 100% of either" fees or commissions.
understand." Regardless of how much a client has lost this year, they won't be happy, he says. "Even if you tell them the industry average was down 20%, that they lost 15% is still not a good thing."
Attitudes such as this mean advisors "should be spending time talking, discovering and learning behavioral signs of discomfort," says Gurney. To help advisors understand their clients' emotional ties and behavioral responses to investing, Gurney is offering three new Internet-based continuing ed courses through Moneymax, her automated, Web-based personality profiling system (www.moneymax.org).
Gurney says she's gotten an earful of disputes from clients of advisors, and is a "bit surprised" that advisors aren't hearing more complaints. For instance, she says two female clients of advisors have decided to go the self-directed route "because they can't justify paying [an advisor] 1% to lose money." One woman is pulling her entire portfolio from her advisor so she can "buy stocks she believes in."
Another client comment went like this: "'I called my advisor and he hasn't called me back. I have a feeling he doesn't know what to tell me.'" Says Gurney: "Advisors need to reach out and give [clients] information, even if it's 'I can't predict'" what's going to happen.
Dave Loeper, president and CEO of Financeware.com in Richmond, Virginia, says he's worried about how "clients have been personally devastated" by the market slide. "It's not uncommon to have a client's portfolio down 30%." Loeper is a big proponent of helping clients achieve their life goals, and says that many people who retired last year "are now staring at a 40% reduction in income. People are planning on retiring this year, but they won't be able to do it." He says advisors are "kidding themselves" if they think that reiterating the 'hang in there for the long haul' speech will calm all clients' nerves. "That's fine for clients with 20 years ahead of them, but the average client is near, or in, retirement."
Loeper says this market downturn is akin to the one that hit in 1973 and 1974, when "nearly half of the brokers lost their jobs." He predicts this market slide will prompt a rash of suitability lawsuits. "This market will leave a footprint that will last for years."
Planner MacPhee, who manages $40 million in client assets and serves a clientele of mainly retirees, says, "This last drop scared them more than in the past." She says she's done a lot of hand-holding, and agrees with Loeper that her clients won't respond well if she tells them to stay in it for the long haul. "I told my clients that what we bought was good quality," she says. And she tells them "it would never be realistic that everything they own would be up." She likens this market downturn to the one that hit last March, but says this one rocked investors' portfolios harder because so many were heavily weighted in technology stocks.
Keeping the Faith
Steering clients away from tech stocks is a maneuver that kept Sidney Blum's clients' portfolios from getting slammed. A fee-only planner with Successful Financial Solutions in Northbrook, Illinois, Blum says clients have asked him over the last few years why he wasn't putting them in tech stocks. "Now they know." As for revenues, Blum says they "are down this quarter, and we suffer along with clients. That's the way it should be."
Elaine Bedel, a fee-only planner with Bedel Financial Consulting in Indianapolis, Indiana, says she's had a couple of clients make some noise about fees since the market slide. "People will always be fee-conscious by nature." But since she has many long-time clients, and relies on "the initial education I give clients when they first get involved to help them through these tough times," she hasn't had to decrease fees. "I can see how a new planner just starting out may have to make certain compensations," she says.
What's the most direct way to soothe clients irked at the idea of paying a fee for the management of a shrinking account? Easy: Stop making them pay it. Leader Capital Corporation in Portland charges clients not on a percentage of the assets under management, but on a percentage of the growth of those assets. If from one year to the next there is no growth, there are no fees. |
Last year when we reported on Leader and its concept of performance-based asset management ("Contingency Plan," April 2000), we wondered if a bear market would grind the firm into oblivion. But while Jason McMillen, vice president and portfolio manager at Leader Capital, admits to some belt-tightening, he assures naysayers that the firm is still in business, and that it still stands by its performance-based strategy.
"We think performance-based money management is definitely the wave of the future," says McMillen. "It only makes sense. If you build a garage, you pay the contractor when the garage is finished. That's the way all business is done; lawyers and investment managers are the only people who charge you no matter what the outcome."
His conviction is aided by the fact that the firm also has transaction-based and traditional fee-based business to ensure a steadier stream of revenue. Less than a quarter of the firm's business is in performance-based accounts. Still, that isn't necessarily by choice; such accounts are offered through limited partnerships, and the SEC requires that LPs be offered only to accredited investors with net worths of more than $1 million. "We promote the performance-based product," says McMillen, "but the regulators say you have to be a qualified investor to be in a performance-based program, [which means that] the smaller investor can't benefit from it."
The firm advocates a concentrated equity investment strategy, building portfolios of no more than 15 stocks. "The correlation of a 15-stock portfolio is about 80%-85% to the market. A 30-stock portfolio gets up to almost 90%. By the time you get to a 60-stock portfolio, performance is going to match the market almost exactly," says McMillen. "We believe that concentrating portfolios into 10 to 15 stocks gives us the higher volatility and higher beta to outperform the index." Investors with their entire portfolios at Leader Capital are encouraged to put three-quarters into index investments and the remaining quarter into the concentrated investments.
"There's nothing new about performance-based management," McMillen concludes. "It's been around. It just hasn't hit the mainstream."--Karen Hansen Weese
Sam Hull, a fee-only planner with Northstar Financial Planning in Bedford, New Hampshire, had a run-in about fees with a 40-year-old client who'd recently received a large inheritance. The client "decided in the last quarter that he wasn't going to pay his $3,000 retainer," Hull says. The client kept asking, "Should we get out of the market? Should we sell our equities? He wanted me to sell the equities and move to cash. I said, 'No, we don't want to sell. We have a long-term strategy.'" The client retained a lawyer because he claimed Hull wasn't doing as he'd requested. But the lawyer was soon dropped after a client-advisor chat, Hull says. "We had talked about downside risk, and the fact that trees don't grow to the sky forever. All of a sudden [the market's] going down and he panicked." Hull says he's still a little baffled by the encounter, and eventually he did lose the client, a first for Hull. "It could be my failure to give him enough education, or it could be his personality."
A fee and commission advisor with LPL Financial in Erie, Pennsylvania, Kay Johnson says the market environment has been more of a pro than a con. Clients haven't complained about fees, but when they do ask about them, Johnson says, "When the markets go down, so do my personal savings and retirement. So I have a double incentive [for myself and the client] to get the market going the other way."
Tim Kochis, of Kochis Fitz, a wealth management firm in San Francisco, says his firm sends a regular quarterly letter to clients, and the last one included specifics about the market crumble. "Rather than calling, and maybe alarming them, we sent clients a letter to alert them that when they do get their quarterly report, it's not going to be pretty," Kochis says. And many clients have called to say, "'Glad you wrote.'"
Some clients of Sheryl Garrett, a planner with Garrett Financial Planning in Overland Park, Kansas, are glad to be dealing with a fee advisor rather than one who works on commissions. "I've had clients come to me who are very disenchanted with advisors who use commissions because they tend to tie it to portfolio performance," she says. "My fees aren't tied to performance and clients don't hold me responsible for ups and downs in the market." Garrett says some of her clients even say they believe "they were put in a certain portfolio because the advisor got paid a higher commission."
For Gordy Jones, a planner with Raymond James Financial Services in Venice, Florida, who's two-thirds fee-based and one-third commission, the down market hasn't thrown any new clients his way. But clients who thought they might go it alone because they were tired of fees decided against the idea. Some clients said, "Why should I be paying this guy a fee when I can do it on my own?" But "they never left."
Whether they work on fees or commissions, advisors who say business is up this year tend to be the ones who believe a fully informed client is the best kind to have. Ellwood Jones, a planner with Capital Region Financial Group in Sacramento, California, whose business is 65% commission-based, says the market drop has taught him quite a few lessons, probably the most important being that planners must prep clients before the bear strikes. Advisors need to "talk to people up front, hold their hands, and [tell them] how an investment works and how long-term investing works," he says. That's been his policy all along, and now, "we're poised to do better than we did last year." That's advice you can take to the bank.