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.
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.
“Everyone’s book of business is in question now,” says Beatty. “Though other practices might be cheaper to purchase than in years past, you don’t know what you’re buying. If advisors aren’t talking to their clients–which is a big problem in our industry–then the value of the business decreases daily. I won’t touch a book until I have a lot of time to assess its worth.”
To boost the financial standing of their own practices, advisors are spearheading a range of initiatives. Though increased servicing of existing clients is a common theme among sources, most have not followed Solomon’s decision to suspend new client acquisition efforts.
Beatty has intensified his marketing campaigns, in part by holding more seminars, though he acknowledges the work thus far has largely fallen on “deaf ears.” But he is optimistic he can boost his client base by 25% in 2009.
Because of investor anxiety, advisors say they are also finding prospects more receptive to products offering guaranteed returns, including fixed and equity-indexed annuities, bonds, money market funds and certificates of deposit. Bob Rockwell, a certified financial planner and principal of CCB Financial Services, Sandy, Ore., says that during the past year he’s doubled sales of FDIC-insured CDs. The revenue windfall offsets a roughly $10 million drop in the value of equity investments, thereby maintaining a combined portfolio value of $60 million.
Bobbie Munroe, a certified financial planner and principal of Fraser Financial, Atlanta, Ga., says she’s weathered the current financial crisis more successfully than colleagues who subscribe to an AUM model by charging clients a fixed annual fee. Ranging between $2,000 and $20,000 per year, the retainer fee is determined by the level of client contact required and, secondarily, the size of the account.
This business model, she predicts, will be more widely adopted in future years, in part because baby boomers, the largest demographic population in the U.S., are entering retirement in larger numbers, and thus shifting from an accumulation to income distribution phase.
“If you have a dwindling asset base and an aging clientele, then you’re getting less money for more work if you tie fees to AUM,” she says. “So I think a fixed annual fee will become more popular.”
Still other advisors are, as the Cerulli report counsels, compensating for a loss in fees by ratcheting up sales of insurance products. Rousso says his overall revenue during the year past was up 14%, thanks to a brisk business in employee benefits, including individual and group insurance products, which account for 65% of his practice. Part of the gains he credits to increases in sales of universal life and term policies.
But he has profited most from sales of health savings accounts. A creation of the Medicare bill signed by President Bush in December 2003, HSAs help individuals save for future qualified medical and retiree health expenses on a tax-free basis.
The plans also can yield significant savings for employers. One business client of Rousso saved $150,000 in health care expenses by shifting from a PPO to an HSA plan. For Rousso, the switch added up to a nice commission: 7% of the annual $350,000, premium, yielding him $24,500.
Company medical plans of all types, including HSAs, have also been lucrative for Rockwell, who makes a point of promoting his health insurance portfolio whenever he meets with a business client. More often than not, he says, the plug yields results, as a growing number of companies are frantically searching for ways to contain rising health care costs.
“About 80% of my business clients are interested in exploring options when I mention health insurance,” he says. “I derive a monthly commission on the sale, which is typically 10% of the premium on individual accounts and 2% on group accounts. It’s a nice income stream because you’re making a percentage of every premium payment.”
Rousso adds that life insurance and investment advisors who have little knowledge of health insurance plans would do well to partner up with an expert.
“When you hook up with a really good health insurance advisor, you’ll end up getting not only more health insurance sales, but also more 401(k) business, because the referrals work both ways,” he says. “And, in most cases, partnering advisors should be able to set up joint revenue-sharing arrangements.”