Deans List April 21, 2007

A Different Kind of "Investment"

As the parent of a daughter away at college for the first time, the events in Blacksburg, Virginia, last week had a particularly horrific effect.
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No, she’s not going to school at Virginia Tech, but what happened there could happen anywhere. Parents often worry that, despite years of raising them carefully, our kids will, nonetheless, wind up in the wrong place at the wrong time. Yet, so far as we know now, all those poor kids did was be in the right place – where they were supposed to be – at a very wrong time. In a matter of minutes, bright and promising futures were brought to a premature close for no better reason than their proximity to a madman.
Many will try to get back to “normal’ this week – while for some, normal will never again seem possible. I’ve tried several times to pick up some other theme or idea to speak to in this week’s column – some normal topic, if you will – but all I can think of is those students that won’t be coming home to families. Families that, like mine, were anxiously waiting to have their family once again be complete.
People die unexpectedly every day, of course – and children much younger than the students at Virginia Tech unfortunately have their lives snuffed out in much less dramatic fashion. Still, those tragedies that grab our collective attention for a brief time can serve as a vital wake-up call to things that our busy lives all too frequently set aside for “another time.’
The admonitions that are part of our industry’s DNA – start early, do as much as you can, keep an eye on things – apply to many areas of life. As we make investments in our 401(k)s, we also invest in our friends and family – investments that generally produce a yield that would put to shame the most giddy hedge fund investor.
This week, if you don’t already, I’d encourage you to tell those you care for how you feel – tell them as often as you can; and keep an eye – or an ear – on them, particularly the ones you don’t see every day.
You never know how long you’ll have to do so, after all. And the only thing worse than losing a loved one – would be losing them without having told them how you feel.
In Practice April 21, 2007

Commission Revenue Models Losing Favor

Fee-based practices are growing, with 46% of advisers adopting that pricing structure, an increase of 35% over the past five years.
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According to research by Cerulli, presented in The Cerulli Edge, the firm’s quarterly report, just 13.3% of advisers were solely commission-based in 2006, down from 26.3% in 2005. However, not all are moving directly to a fee-only model. Forty percent of advisers reported using a combination of fees and commissions. Cerulli predicts that “as new products and services designed for fee-based advisers become available, and payouts to advisers on fee-based accounts increase compared to commission-based accounts, we believe this gap will widen considerably in the future.”

As commission models lose favor in the public eye and fee-based practices become the standard, Cerulli says, advisers will need to find new ways to differentiate their services as their revenue model becomes more common and being a fee-based adviser is no longer the competitive advantage it was previously because of increased competition. “Those who don’t differentiate will surely lose assets to advisers who do,” the report says.

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Overall, advisers are reporting an increase in the level of home-office support provided in building their retirement business, as advice for retirement is increasingly being sought. Therefore, moving forward, “broker/dealer firms that actively look to expand both the number of retirement product offerings and the level of specialized home-office support across multiple planning disciplines (e.g., estate planning and wealth transfer, among others) will be in a comparatively better position to increase firm assets considerably over the near term.”

As part of that differentiation, advisers will form more team-based practices, Cerulli predicts. “As the team forms,” the report says, “some advisers often will begin to specialize in some aspect of the practice, such as real estate planning, while other advisers take over other roles, such as asset management.” This means advisers will specialize both internally and externally – internally on an aspect of team management (i.e. asset management, new client development, plan creation/monitoring, or retirement income) or externally on a business area (i.e. qualified retirement plans, wealth/charity, estate planning, tax planning, or retirement income planning). “Teams allow advisers to share the responsibilities of the practice, increasing scale and accentuating the strengths of the individual advisers, while minimizing weaknesses,” the report says.

Channel Distinctions

 

Of the six major adviser channels (independent broker/dealer (IBD), national full service broker/dealer (NFS), insurance broker/dealer, registered investment adviser (RIA), bank broker/dealer, and regional broker/dealer), the independent broker/dealer channel is the largest by total financial advisers (35%) and had growth of 3.1% over the previous year. However, the national full-service broker/dealer channel, which now has a 23% marketshare, has the highest concentration of advisers at 20 per branch, more than double the next closest (IBD) which has just fewer than 10 per branch, followed by the regional broker/dealer channel with an adviser concentration of 8.05.

Regional broker/dealer and bank broker/dealer channels have seen decreases (each with only 5% of the market), something Cerulli attributed to the increased popularity of team-based business models, fee-based pricing, and adviser specialization, coupled with the higher adviser payout found in the IBD and registered investment adviser (RIA) channels. All those circumstances, in conjunction with one another, have led advisers to move away from the more constrictive models found at the traditional broker/dealers.

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