The devastating decline in asset prices wrought by the credit crisis and a continuing economic contraction have not only up-ended the retirement plans of millions of baby boomers. The financial havoc has also hit hard the compensation of their fee-based advisors, many of whom are now looking to alternative revenue sources to compensate for the losses.
“Most advisors are seeing their compensation drop commensurate with what’s happening in the markets,” says Neal Solomon, a certified financial planner and a managing director of WealthPro LLC, Gloversville, N.Y. “The strongest advisors have a hybrid model: those who can work on a commission or fee-basis, which provides for a diversified income stream.”
Solomon’s conclusion dovetails with the findings of a January 2009 report from Cerulli Associates. The Boston-based research firm warns that advisors who derive their pay primarily or exclusively from fees will need to explore other sources of compensation during the downturn if they’re to keep their income on an even keel.
Most fee-based advisors peg their compensation to assets under management, which typically ranges between 1% and 2% of AUM. Thus, given $5 million in investable assets and a fee of 1.5%, the advisor’s annual compensation will total $75,000. If those assets suddenly drop in value to $2.5 million because of declines in equity and real estate prices, the advisor’s pay dips to $37,500.
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That’s not chump change for the growing number of insurance and financial service professionals who rely on fees for at least a part of their revenue. According to the Cerulli report, nearly two-thirds (64.5%) of advisors in 2008 employed a “fee-centric” revenue model (fee-only and fee-based, the latter including advisors who derive between 50% and 90% of revenue from fees). This compares with 49.6% of advisors in 2007.
By contrast, just 12% of advisors last year were paid on a commission-only basis. Another 23.5% received a “fee-and-commission mix,” where the fees top out at 50% of revenue. In 2007, these percentages were 21.8% and 28.6%, respectively.
“Advisors have a limited number of options in the current environment to create additional revenue,” says Scott Smith, a senior analyst at Cerulli. “They can expand their client base and asset levels. Or they can alter their product mix, possibly by increasing their attention to insurance products, which would increase their commission-based revenue.”
This message has not been lost on advisors feeling the pinch. Bryan Beatty, a certified financial planner at Egan, Berger and Weiner, LLC, Vienna, Va., says his recurring fee revenue is down 30% from the year-ago period due to a corresponding decline in asset values. Leon Rousso, a principal of Leon Rousso, CFP & Associates, Ventura, Calif., suffered a similar double-digit dip in his own AUM-based pay, as did WealthPro’s Solomon.
The slide in fee-based comp cannot in all cases be traced only to plummeting asset values. For some, the bear market also comes at a less than optimal time.
Ben Trujillo, a chartered life underwriter and principal of Money Concepts, Santa Fe, N.M., says he had to jettison some clients after recently moving to Santa Fe from Denver. The loss comes on top of a 20% dip in AUM fees and commissions, an erosion he attributes mainly to increased financial difficulties among corporate clients that are delaying retirement benefits planning for rank-and-file employees and executives, the focus of Trujillo’s practice.
Because of a heightened concern among investors about the state of the economy and the markets, sources say, they’re also spending more time communicating with skittish clients to reassure them about their retirement plans and investment portfolios. Advisors thus have less time to devote to prospecting for new clients.
“With certain exceptions, I actually stopped taking on new clients starting last year,” says Solomon: “We continue to accept referrals to family members of clients. But we’ve turned away people who have no connection to the firm. I told them, ‘There’s a crisis going on and my clients own my time.’”
All the extra hand-holding, combined with an ever lengthening stream of bad news about the economy, also carries an emotional toll. Rousso observes that spending time on the phone with clients to urge them to stay the course is frequently difficult. At times, Rousso says, he feels like “throwing in the towel.”
As advisors shift to survival mode, they’ve also had to defer long-term planning for their own practices. Beatty notes that he’s put a hold on efforts to buy out the clienteles of retiring insurance and financial service professionals, in part because he no longer has the time to do the necessary due diligence. The worsening economy, he adds, is raising doubts about the value of such businesses.