From the July 2009 issue of Boomer Market Advisor • Subscribe!

Embracing the new advisory standard

Recent turmoil in the financial services industry has created a heightened demand for transparency and accountability from investors. Advisors who assume fiduciary responsibility will earn their clients' trust and set themselves apart from their peers. Likewise, broker/dealers who help advisors adopt a more transparent advisory model will stand apart from the competition.

The question is how can firms support representatives as they transition to fees without turning their practices upside down? The answer has three components: product, process and technology.

Product - When making the shift to fees, advisors face numerous choices. Based on their clients' needs - as well as their own core competencies - advisors can choose from a wide spectrum of fee-based models. It's helpful to visualize these options as a quadrant. The horizontal axis tracks the range of asset management flexibility, while the vertical access tracks the rep's level of compliance responsibility. Advisors who fall into the bottom left quadrant - little asset management control and minimal compliance responsibility - are advisors who are most comfortable acting as "asset gatherers." In this quadrant, product solutions such as solicitor programs are a good fit. On the opposite end of the spectrum, those who fall into the top right quadrant - complete control over assets and full fiduciary responsibility - act as portfolio managers.

Meanwhile, yet another layer exists on top of the four quadrants: a range of fee-based products, including separately managed accounts, mutual fund wraps, ETF wraps and unified managed accounts.
The scenarios contained within the quadrants represent perfectly viable models for representatives to adopt. When you're just starting out, you don't want to be limited to just one or two options. Your broker/dealer should be able to make it easy for you to explore all options and provide consulting services so that you can select the one that best suits your practice.

Process - Many advisors are apprehensive about moving to fees because they don't know what to expect. First, there is the question of how they'll get paid. Then, there's the dilemma of how to prepare performance reports and billing notices and how they will market themselves. Perhaps the biggest anxiety of all is how to communicate their new business model to their clients. When you try to explain that this is a better way of doing business, how do you respond to the inevitable question, "Why haven't you been doing it for the past 10 years?"

Your broker/dealer should be able to make these concerns non-issues. The best firms go beyond support and act as process re-engineering consultants. They provide multiple options for customizable billing and performance statements; pre-approved and compliant marketing materials; and educational opportunities, including one-on-one consulting.

Technology - Making the transition to fees presents enough challenges in terms of your client relationships and practice management processes - you don't need paperwork and other operational hurdles getting in the way. Your broker/dealer's technology should provide you with a simple, standardized, and streamlined process for your advisory business.

The problem is that too many firms have separate technology platforms for commissions and fees, which means representatives have to learn a whole new set of systems when they transition from one side to the other. These operational silos make things difficult for reps, particularly those who want to offer a full palette of options for their clients that includes both commission- and fee-based products. If you can find a broker/dealer that offers one integrated platform, shifting to an advisory model will be effortless from a technology standpoint. Furthermore, going back to the four quadrants, it is important to make sure your firm's technology supports the entire spectrum of fee-based models.

Making a major transformation in your business is never easy. Without change, however, growth and progress is simply not possible. The events of the past several months will force the industry to change in ways that will create new opportunities for advisors who are ready to embrace the new standards of accountability.

Jim Livingston is CEO and Rob Dearman is SVP of Advisory Practice and Platforms Strategy for the National Planning Holdings broker/dealer network.

Reprints Discuss this story
This is where the comments go.