In a similar manner, fee-based planners who are registered investment advisors (RIAs) often argue that, as fiduciaries, they must comply with high standards for ethical conduct. Since compensation increases as asset grow, fee-based advisors can also claim the model aligns their interests with those of their clients.
The marketing pitch appears to be working as the RIA channel is increasingly taking marketshare from brokers and is expected to continue to do so. Tiburon Strategic Advisors, for example, expects assets for fee-based advisors to climb to $5.2 trillion by 2017, up 100% from 2011.
From a marketing perspective, the issues of compensation models and the benefits of being a fiduciary are multifaceted. On one hand, registered reps need to defend their compensation models while fee-based planners must be prepared to respond to arguments that support commission-based compensation.
Indeed, some industry observers maintain that no method of compensation is free of conflicts. The fee-based model can incentivize financial planners to have their clients avoid assets that aren’t managed by advisors. For example, such advisors have an incentive to encourage clients to invest in stocks and bonds rather than real estate as real estate typically isn’t included when calculating asset-based fees.
Planners that charge hourly fees also have conflicts. Like any professional that charges by the hour, such planners have an incentive to increase billable hours. Turning to registered reps, the professionals must balance the need to generate transaction commissions with the best interests of clients.
At the same time, their selection of investment products can be influenced by the commission structures that investment managers provide. Armed with that knowledge, advisors—regardless of their form of compensation—should be ready to point out the advantages and disadvantages of different compensation models and explain why they think the model they employ is the best suited for their clients.
In some cases, for example, a low turnover portfolios managed by a commission-based advisor may have lower costs for clients than a fee-based model. Yet, for larger accounts managed by advisors that use a more active portfolio management approach, the fee-based model may be the most appropriate.
It is important that advisors don’t let the debate over the best compensation model distract them from articulating how they can deliver value. Indeed, when considering that each compensation model has its advantages and disadvantages, advisors should consider competing on the quality of their investment advice, the reasonableness of their levels of compensation, their ability to disclose conflicts of interest, and their skills in articulating the appropriateness of their investment recommendations.
In cases where commission-based compensation may be less costly to clients than a fee-based approach, registered reps should be ready to show financial models that illustrate the benefits for the cost savings. At the same time, registered reps should illustrate the depth of their fund analysis and research capabilities.
In a similar manner, fee-based advisors and hourly advisors should be prepared to emphasize the advantages of their compensation models. From a compensation perspective, some advisors may want to adopt a hybrid approach that allows them to capture revenues based on fees or commissions.
By doing so, advisors can show their prospects that they can choose the most appropriate compensation model for their clients. The debate over fiduciary standards for registered investment advisors and the suitability requirement for registered rep, meanwhile, has certain similarities to the debate over compensation models. That is, the ultimate driver in making decisions should be a desire to serve clients.
With that in mind, registered reps can deflect criticism that they aren’t fiduciaries by illustrating how they provide in-depth research when selecting investments and that fiduciary standards don’t guarantee that a registered investment advisor will deliver quality services. Registered investment advisors, meanwhile, should be ready to show how they have strong capabilities and a business mindset that results in them meeting their clients’ needs.