Successful financial advisors have the ability to maintain a consistent level of professional integrity and service while changing with important trends in their business. As I wrote in last month's column, today's trends are challenging advisors to modify methods that have worked successfully in the past. They include:

1. Lower risk/return needs and expectations among many investors.
2. More emphasis on managing investment costs.
3. Investors' desire to look beyond packaged products-specifically mutual funds and variable annuities-to find appropriate solutions.

During the 1990s, mutual funds and variable annuities became the mainstream of retail financial services because they met needs of investors and advisors alike. For investors, they provided access to professional money management and diversified portfolios at apparently attractive costs. For advisors, they simplified client services while paying worthwhile compensation.

More Expensive Than Investors Think

Mutual funds and variable annuities both peaked in sales in 2001, and it is my belief that neither product will greatly exceed those sales levels in the near future. The reason goes beyond the fact that investors are acquiring interest in alternatives-including separate accounts, exchange-traded funds, and fee-based brokerage accounts.

Mutual funds and variable annuities can be relatively expensive products for today's conservative investors to own, unless advisors carefully scrutinize all cost components and recommend cost-effective choices. In addition, cost analysis in these products can be difficult, because important components of expense are buried. It has taken significant studies and scholarship to realize what these elements are and how much they cost. In this article, I'll share findings and suggest how to apply them.