A Trend Confirmed?

Commonwealth started fee-based services in the “early ’90s in a program with Fidelity Advisor Funds,” launching its own program in 1996, Bloom recalls. “We’ve supported it for a long, long time, and we’ve continued to build it out and improve the pricing.” Bloom thinks of the model as “my advisors [are] in the advisory business,” and Commonwealth is “in the infrastructure business.” As use of Commonwealth’s platform has grown to include more than 1,000 representatives, the firm has lowered fees and increased payouts. Some advisors want to manage clients’ money themselves; some want help from Commonwealth’s home office; some get help from the firm’s research sources. The “fastest-growing group” of advisors within Common-wealth, however, wants to “outsource the money management.” Bloom asserts that “whether the advisor wants to efficiently do it on his own or bring in third parties, whether it’s traditional separate accounts–even some of the TAMPS–we’ve tried to contract with [them] directly. Rather than do it on their platform, we’ll do it on ours.”

“The alignment of the financial interests of the advisor and the investor has been driving fee-based [advisory] business since way back when. What continues to drive it is the shift to more holistic planning where the advisors want to work more and more, and go a lot deeper, with each one of their clients. The fee-based relationship is really the model that allows them to do that.” Where previously Bloom saw advisors bundling their services for clients’ “asset management, retirement accounts, corporate 401(k),” now he sees advisors splitting the asset management fees away from planning. “They can do hourly, they can do flat fee, they can have clients on a retainer,” so fees are commensurate with the services advisors are actually providing for a client. What is really important, he notes, is making “sure that clients value the non-asset management portion of their advice.” Bloom talks a lot about “fair value pricing” for the client. If a client with $1 million of assets under management just wants money management, should they pay the same amount as one who wants the same money management, as well as 20 hours of advice about other wealth-related topics? “There should be a differentiation in what those two clients pay.”

A Third-Party Trend

Bloom sees a big surge in third-party money management. An advisor’s “most valuable commodity is time. It’s very difficult to hands-on manage all the money, and manage the relationships, and at the same time go very deep with these planning issues.” He sees advisors using third parties to manage the assets, but even more often sees advisors using third party money management to help segment their book. “They may say… ‘We won’t take any new clients under $250,000.’ But what they’ll also say is, ‘If it’s not at least $1 million, we’ll use one of the approved third-party [managers].’” Advisor-managed accounts still hold the lion’s share of assets, but “year over year,” he points out, third party asset management is “doing very, very well. And it’s certainly keeping the pressure on us to make sure we keep adding robust managers to our platform.”