Many advisors in the bank channel these days like to claim that they are doing mostly fee-based business. After all, a decade of anemic portfolio performance has left many clients with a bad feeling about the transaction side of the business, and going fee-based is supposed to better align the interests of advisor and client.
The truth is, however, that at least in the bank channel, fee-based business remains a small part of what most advisors are doing -- especially in terms of revenues generated.
The fee-based share of advising in the banking channel reached a high of 14% in the third quarter of 2013, reports Scott Stathis, an analyst with BISRA. Thats up from 13% in the second quarter and 11% in the first quarter.
While that represents a pretty low share of the advisory business being done at the banks, he says it shows a continuing upward trend. In 2007, only 4% of bank advisory revenue came from fee-based business, he says.
What is driving the gradual increase in fee-based advising? If you look at the banks with higher participation rates of financial planning -- meaning those where at least 50% of the advisors are doing at least one plan of some kind per month, even if its just a college funding plan -- you see a 114% higher amount of fee-based business than at banks where there is no such planning going on, he says.
Stathis sees the shift coming from both advisors, who see a more fee-based operation as an attractive life-style changer, and from the banks themselves, which he says like the predictability of the revenue generated by fee-based business -- not to mention the higher-net-worth clients it attracts.
A transaction-based advisor lives month-to-month and is only as good as his last month, says Stathis. You typically have maybe 2,000 clients and youre jumping from one to another with single transactions and the number of your clients with more than one investment product is very small. With a fee-based business, you have many fewer clients, youre a professional, and your revenue is much more predictable and recurring.
Peter Bielan, a principal at the research firm Kehrer-Saltzman, says a majority of banks are trying to incentivize their advisors to shift more of their focus to fee-based business. In a survey of 48 banks we did, 60% had incentive programs in place, he reports. Common among these incentives, he said, is offering a fee-based premium, usually about 5%, but with some ranging up to as high as 8%. Some banks have introduced a separate fee-based grid offering payouts in the 40-50% range.
Another incentive found in the survey was paying a straight basis-point amount to the advisor, which could range up to 50 basis points on fee-based assets brought in. Our latest survey shows that banks are becoming much more sophisticated about the way their investment programs work, and about how to make the most of them. It used to be all about the grid. Now its more about growing fee-based business.
Rick Rummage, a career consultant and president of the Rummage Group, agrees that banks are pressing their advisors to do more fee-based business, but he is skeptical about how hard theyre pushing. Do the banks really want advisors going all fee-based? he asks. Not if it reduces overall revenue. Bank managers want more fee-based business, but not too quickly. (Rummage is also a regular contributor to Bank Investment Consultant.)
Indeed, with the fee-based share of advisor revenues still at just 14%, it seems their wish for slow increases is coming true.
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