A value proposition based on performance alone
puts an advisor at a disadvantage. Not only does success depend on factors outside the advisor’s control, such as the returns from individual securities or professionally managed funds, but the strategy also can promote a horse-race mentality among clients, leading them to depart if the promised out-performance does not materialize.
On the other hand, fee-based guidance changes the conversation, creating an incentive for advisors to demonstrate how they add value beyond performance.
Because compensation is more transparent, advisors can show how they add value as wealth managers, financial planners and behavioral coaches. In other words, the advisor is the alpha. As such, the advisor becomes an even more important factor in the client-advisor relationship, because the greatest obstacle to clients’ long-term investment success is likely themselves.
Depending on the structure and amount of charges, a transition to a fee-based practice may involve no change for clients, except that charges should become more transparent and potentially tax deductible.
And advisors’ needn’t expect a drop in revenue. In fact, they may see the opposite. Advisors who increased their assets in fee-based accounts by 25 per cent or more have seen revenue growth of 47 per cent over three years, more than double the average growth rate of 21 per cent.
That is compared to a revenue growth of 19 per cent for advisors who increased their assets in fee-based accounts by less than 5 per cent in the same period, according to research by data aggregator PriceMetrix Inc.