Advisors continue marching toward a fee-based business model. According to a March report by Cerulli, the number of fee-based advisors rose to 52% in 2010. Fee-based advisors far outnumber advisors using other revenue models. Twenty-two percent of advisors have a mix of fees and commissions and 14% are fee-only. Just 11% of advisors are commission-only.
The resistance to fee-based practices, Cerulli found, is from investors. Many investors, according to the report, indicate that they prefer to pay "discrete commissions;" however, in these cases, investors assume their advisor is acting as a fiduciary.
Scott Smith, associate director at Cerulli Associates, noted three talking points on the benefits to advisors who use a fee-based model. First, he told AdvisorOne, is that operating under a fee-based model brings advisors under a fiduciary standard.
"Advisors have been gaining a lot of traction on that point especially in the past two to three years," he said. "Furthermore, a fee-based model more closely aligns compensation with an advisor's client base. They have to grow client assets to grow revenue."
Finally, with a recurring revenue stream, advisors are able to spend more time on their existing clients, Smith said, instead of looking for new business.
While it seems at first glance that clients would rather pay commissions, Smith says part of that has to do with the way the question is framed. One hurdle advisors have to pay attention to, he said, is to let clients understand what they're paying for by comparing the costs over time of recurring fee-based costs and transactional commissions.