In the late '90s, fee-based business was the new rage. Advisors who embraced this alternative method of compensation boasted that it aligned their interests with those of their clients. The advisor got a raise only when the clients' assets increased. So it was win-win. The brokerage firms too saw fee-based business as a way of both expanding and stabilizing their revenue streams because commissions are so tied to the volatility of the market -- increasing during booms and nearly disappearing during busts.
In this month's cover story by Ellen Uzelac ("Fee-Based Business: A Progress Report"), we sought to measure to what extent this business has grown over the years. What we found is that all the concerted efforts of brokerage firms to move their advisors and their clients into fee-based programs have had an effect, but the impact has been more wide than deep. Most FAs are in fact doing fee-based business these days, though most of their assets are still in commission-based programs. So, it would seem that advisors are interested in moving toward fees, but are having trouble making the sale.
Further complicating matters, the notion that fee business is a more ethical or unconflicted business model is being directly challenged by NASD and authorities in New York. The regulators have gone after UBS, Morgan Stanley and Raymond James for defrauding brokerage clients whom they claim would have come out ahead in traditional commission-based accounts rather than the fee-based accounts to which the firms are alleged to have diverted them (see Janet Levaux's report in Research Reporter).
As our cover story makes clear, there are FAs who feel that fee business has liberated them to truly serve their clients and there are likewise advisors who strongly defend commission-based business as being more pro-client. If there is any single overarching truth here, it would seem to be that there is no one model that works best for every advisor or every client.
What is imperative from the standpoint of advisors who take their ethical obligations to clients seriously is that they add value. Some advisors who have a talent for investment research valued by their clients find that commissions are the fairest and most measured compensation for their work. Other advisors swear that it is only when freed from the pressures of following the market that they can focus on a client's need for updated beneficiary designations or get into the nuts and bolts of retirement income planning.
The regulatory bean counters who allege that "over one 18-month period, 31,565 accounts paid excessive fees of more than $51 million" (to quote the recent complaint against UBS) are undoubtedly precise in their calculation of the value that has been diverted. But do they take into account the value that has been added? If not, they themselves are adding no value to the debate.