PANC 2009: Justifying Adviser Compensation to Clients

New requirements for disclosing retirement plan fees will put pressure on plan sponsors, plan advisers, and plan providers to justify the value of services received or offered, according to Aaron Hodge, Senior Vice President at Fidelity.

Speaking to attendees at the PLANADVISER National Conference in Orlando, Florida, Hodge contended that the rationalization of the value of services and new disclosure regulations will drive the adviser pricing model.

Matthew P. Mintzer, head of US Advisory Sales, AllianceBernstein Defined Contribution Investments, said the new fee scrutiny is increasingly leading advisers down the path to fee-for service versus commissions, which is generally better understood by plan sponsors. However, Hodge disagreed, saying quantifiable services may command a flat fee, but services that require a variable amount of time can be priced using basis points.

Mintzer said there will not be as great a change for wirehouse advisers since prices are driven by the home office, but home offices will have to have conversations with advisers to align their methods for disclosing fees. Hodge contended independent advisers may have an easier time justifying fees as they have no alternative interest other than providing help to clients.

To justify fees to plan sponsor clients, Mintzer suggested advisers rely on recordkeepers to provide plan metrics, such as increased participation or increased contribution rates, to show the value of the services of advisers.

Both panelists indicated they believe adviser training and certifications will help prove value, but that more standardization of credentials may follow disclosure regulations.

As for changing adviser business models, Hodge said he anticipates the adviser market moving to more specialized services. Mintzer said there is a real chance some services will be more difficult for the adviser to provide, as the time and resources it takes to provide certain services may command a higher fee than can be justified to the client. He contended that advisory firms will begin to look at their services and lines of business and ask, “Is this a core business for us?”