Commission Revenue Models Losing Favor

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.

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.