I thought we’d pretty much beaten to death the debate over broker recruiting bonuses (a string that started with my Oct. 31 blog “The Bonus Debate” following Gil Weinreich’s piece for AdvisorOne ), until I read cshow’s comment to my Nov. 13 blog). After pointing out that “all [business] expenses create pressure to increase revenues,” cshow goes on to introduce an issue that is an often ignored difference between the financial sales and advisory business models: “What is missing in this argument is that there are two ways to increase revenues. One is to charge existing clients more, and the other is to increase the number of clients without an equal percentage increase in the expense of servicing those new clients. The second choice is the preferred route for almost every business on the planet. Following the second route, please note that NO customer winds up paying more. How is that any breach of fiduciary duty? In no part of this equation does it matter whether you are a fiduciary, or professional services, or sales, or working for a firm, or self-employed.”
As often happens, (Mr? Ms?) cshow is both right and wrong in this analysis. For years, I’ve marveled at the genius inherent in the investment management business. At least until we started buying digital products on the Internet (apps, programs, books, music, videos and so on), it was the most leverageable model in business history: you can manage $5 billion for only slightly higher costs than you can manage, say, $500 million.
But that’s not really true in the advisory business. Sure, putting client assets under management for a fee did revolutionize retail financial advice, but it’s still more labor intensive than pure investment management—particularly when individualized, ongoing client services such as financial planning, tax planning and/or retirement planning are involved. The client handholding, meeting and communications that are typically required to adequately service advisory clients greatly restrict the number of client with whom a lead advisor can work.