In Practice May 9, 2013

Independence for Advisers Has Its Rewards

According to a study by Fidelity, advisers who moved to an independent model saw the greatest increase in compensation. 
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The second annual “Insights on Independence” examined advisers’ motives for staying with a firm or leaving. The independent channel is seeing the most growth from advisers on the move, and is yielding the greatest increases in compensation.

Families were a big motivating factor, the study found. Fidelity explored the motivations and experiences of advisers who moved firms in the last five years (“Movers”), those who considered a move but opted not to make a switch (“Fence Sitters”), and advisers loyal to their firms (“Entrenched”). The findings revealed lessons for firm leaders and recruiters, as well as advisers considering a move.

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Moving firms can pay off. Financial advisers who moved firms saw a 22% increase in their compensation over 2008, versus 17% for advisers who stayed at their firms. Those who moved to an independent business model, such as a registered investment adviser (RIA) or an independent broker/dealer, realized a 36% increase since 2008.

It’s a family affair. When family is involved in the decision-making process, they had a major influence in encouraging Movers to make a switch (40% of Movers’ family members encouraged the move, compared to only 4% who discouraged it); yet, family had the opposite effect for Fence Sitters, more often discouraging the move.

Movers and Fence Sitters reflect future face of advice. Movers and Fence Sitters were more likely to be Gen X/Gen Y advisers and to embrace the move toward more fee- and team-based business than their entrenched counterparts. Female advisers were most prevalent in the Fence Sitter group, and least likely to be Movers.

Learning from Others 

“This study illustrates the changing face of the advice industry,” said Sanjiv Mirchandani, president, National Financial, a Fidelity Investments company. “While compensation clearly plays a role in adviser movement, the next generation of advisers is considering the whole package—from the type of services they can offer their clients to whether the new firm is a fit for the entire family. Understanding these dynamics can help firm leaders recruit or retain advisers on the fence, and help advisers better consider their options.”

“Advisers considering a move can learn a lot from the thousands of advisers who have preceded them,” said Michael Durbin, president of Fidelity Institutional Wealth Services. “Today there are a range of strategic partners and numerous firm models from which to choose, making the decision to move complex. The best insights often come from fellow advisers who have evaluated their options and made the switch.”

Nine in 10 Movers (89%) reported they were happy with their decisions to switch firms, and 77% reported they were better off financially. Movers cited upside earning potential as the leading reason for making a move. Other top motivators included confidence clients would follow, firm reputation and better work/life balance. Advisers migrating toward independent models also cited the ability to offer better investment solutions and client service as key criteria for selecting that channel.

Movers reported that 79% of the clients they wanted to follow them moved to the new firm. These advisers were also able to strengthen their books of business, increasing their share of wallet with 54% of the clients who moved with them. The report recommends that advisers:

  • Take time to examine the options. Movers spent, on average, eight months from the date when they first started to think about making a move to the date they actually left their former firm. During that time, advisers explored an average of two different business models before making a move, and 80% of those who moved to the RIA channel explored at least one external support option, such as a strategic acquirer or functional outsourcer.
  • Talk to others who have moved. Advisers reported that one of the most important influences in their decisions to move firms was talking to other advisers who had made the switch.
  • Prepare for paperwork and technology hassles. Movers reported some complications with the transition. Paperwork (20%) and technology systems and platforms (17%) proved to be the greatest hurdles in the switching process for Movers. Movers reported that aligning with external resources can help facilitate the operational aspects of a transition.

 

On the Fence?

Fence Sitters reported that “life” often trumped work in their decisions not to move firms, citing family reluctance, “bad timing” for the family and commitments such as caring for aging parents. Families of Fence Sitters who were involved in the decision-making process more often discouraged a move (only 8% of their family members encouraged the move, compared to 23% who discouraged it).

Fence Sitters also reported fear of the unknown and concern about losing clients as top reasons for not making a switch; they, like the Entrenched advisers, were more risk averse than the Movers. These concerns were particularly acute for Gen X/Gen Y and female advisers.

The study found that Fence Sitters are an attractive group of advisers with the highest average assets under management (AUM) of all three groups—$155 million AUM compared with $149 million AUM for Movers and $147 million AUM for Entrenched advisers. Yet, Fence Sitters were the least satisfied, with only 37% saying they are satisfied with their firm. Key areas of dissatisfaction included marketing support and flexible and competitive compensation.

The 2013 Fidelity Insights on Independence study was conducted by Bellomy Research Inc. between November 7 and December 11, 2012, among 783 advisers, whose assets under management are more than $10 million who and belong to one of the following categories: voluntarily moved from one firm to another (Mover); considered a move, but decided not to (Fence Sitter); never considered a move (Entrenched), within the last five years. Bellomy Research Inc. is an independent third-party research firm not affiliated with Fidelity Investments. The study did not identify Fidelity Investments as the sponsor.

The 2013 Fidelity Insights on Independence study can be downloaded here.

Products May 9, 2013

When Returns Are Good, Should Expectations Match?

 

Russell Investments’ Asset Class Dashboard was developed to help advisers establish context and perspective with clients when evaluating the performance of asset classes.

 

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“The concern was that investors were starting to have expectations based on recent performance,” Johann Schneider, program director for capital market insights at Russell Investments, told PLANADVISER. The dashboard helps manage an investor’s expectations of returns, which can be overly optimistic as well as overly negative.

When the tool was first created last fall, equity markets were up 30%, Schneider said, “but we didn’t think was a reasonable expectation to have going forth. We were trying to figure out the best way to communicate where we are in the market, and where do these returns fit in the history of all returns in that asset class?”

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Originally the dashboard was a static picture of the returns of 14 asset classes to help give some context to the returns environment, as advisers were struggling to talk with investors about the current market, but the response from wholesalers and advisers was so positive that Russell built a system to update the chart each month.

“It’s an easy and simple way to talk about performance with a client,” Schneider said, because it does not deal in hundreds of numbers and explanations. “Just 14 assets we think are important. The dashboard tells you whether the period we’re in is normal or not, and we provide a short simple commentary with insight about what that chart means.”

The dashboard is not trying to analyze drivers in each class, Schneider explained, but simply offers perspective on a regular basis, another facet of the performance discussion that advisers have with investors. The goal is for advisers to help clients in setting realistic expectations while sketching a broader context for market movements. 

Like the other tools on Russell’s Helping Advisors site, the tool is a simple visual representation of key data. The dashboard contrasts current 12-month returns with historical and typical returns for a sample of asset classes (represented by relevant indexes), including large-cap U.S. equity, small-cap U.S. equity, global equity, emerging markets, commodities, global infrastructure, global real estate and cash.

Looking Pretty Typical 

“In a period like right now, we found all of the returns are inside their normal range,” Schneider said. “It’s a different conclusion than you might come to right now—we’re not in an extreme environment.” The last couple of months have been a strong market, he noted, and Russell is trying to get advisers and investors to look at a longer term, but with a more reasonable time frame.

“You shouldn’t be too overly optimistic about returns,” Schneider said. While returns have been slightly above average, that does not mean it’s reasonable to project even stronger returns, or to worry about the strength of the market. “There is no reason to expect the market to reverse, or expect strong negative returns going forward.”

It is possible to address returns too frequently, he feels. In the context of a retirement portfolio the data can encourage an investor or adviser to focus on medium- to longer-term returns. “It’s not saying, ‘What is the hottest asset class?’ ” Schneider said. It is a way to look at returns and feel more comfortable, especially as a complement to a more standard performance report that details why Europe or the U.S. is doing well.

The dashboard can be helpful for discussions with investors on the sidelines, for example, because it illustrates so clearly how cash historically has such a narrow range of returns. On the current dashboard, cash stands out as the asset class with the lowest return and the narrowest range. “By investing in cash you are limiting your upside,” Schneider pointed out. “If you want to expose your portfolio to potential for growth you have to invest in some equities. Staying in cash means locking in a negative real return.”

Each month, Schneider will provide related commentary on the Asset Class Dashboard so that advisers can understand any important updates and use the information with clients. The Asset Class Dashboard is part of the Helping Advisors website, what Schneider calls a portal to help provide perspective. The dashboard is a public site, open to anyone.

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