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The COVID-19 pandemic may be the catalyst for the biggest change in advisor compensation since the trend in AUM-based compensation accelerated about 20 years ago.
According to a new report from the Aite Group, the current crisis may force advisors to shift from a focus on AUM-based compensation to one that also includes advice-based compensation. That would more closely align compensation with the services that advisors provide such as planning, college savings, health care, debt consolidation and budgeting, and somewhat insulate volatility in compensation from the vagaries of the market.
The new types of advice-based compensation could include flat fees and/or subscription-based or retainer fees.
"The COVID-19 financial crisis may have the greatest impact on advisor compensation moving forward," according to the Aite report. "While AUM-based fees are still a core driver of compensation, many advisors will need to examine alternatives to unbundling advisory fees and consider lowering or eliminate their advisory fees and adopting advice-based compensation."
Failing to do so risks losing clients, says Wally Okby, senior at analyst at Aite and the lead author of the firm's report. "At the end of the day the client needs to see they're getting value in what they're paying for," Okby tells ThinkAdvisor. "If clients perceive they're paying higher fees to someone who isn't doing anything other than keeping their funds in model portfolios they're going to ask, 'why do this?' "
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The chart below illustrates the current compensation for advisors, based on the Aite report, which included a survey of advisors conducted in spring 2019 before the current pandemic.
Failing to do so risks losing clients, says Wally Okby, senior at analyst at Aite and the lead author of the firm's report. "At the end of the day the client needs to see they're getting value in what they're paying for," Okby tells ThinkAdvisor. "If clients perceive they're paying higher fees to someone who isn't doing anything other than keeping their funds in model portfolios they're going to ask, 'why do this?' "
New regulations such as the SEC's Best Interest standard, which requires greater disclosure about advisor fees and services, is another catalyst for changes in advisory compensation, according to Okby.
"AUM-based compensation has its limits," according to the Aite report. "It emphasizes investment management" … [and] "does not reflect the expanding role of the advisor in financial planning and nontraditional support services," such as advice on healthcare and Social Security for older clients and advice on budgeting and debt consolidation for younger clients. Advisors are essentially providing those services for free while simultaneously collecting less compensation on assets under management when market prices decline.
Okby expects this move away from all asset-based compensation will vary among the different advisor channels. RIAs will likely continue to be compensated primarily based on assets though they will add more advice-focused compensation while that balance between the two forms of compensation will likely be reversed for independent broker-dealers. In between will be a more balanced mix for wirehouse advisors.
For mass market clients, Aite Group expects more U.S. advisor compensation models shifting toward salaried models, like the ones deployed in Europe.,
"The clock is ticking for wealth management firms to adjust their compensation models," the Aite report concludes. "With the industry facing the real possibility of the first global recession since 2009, wealth management firms that have already repositioned their business model and associated compensation plans will ultimately have to deal with them — the sooner the better."
Okby expects the topic of fees may come up advisors do their next annual review with clients unless an advisor's firm mandates that it be done sooner.
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Bernice Napach
Bernice Napach is a senior writer at ThinkAdvisor covering financial markets and asset managers, robo-advisors, college planning and retirement issues. She has worked at Yahoo Finance, Bloomberg TV, CNBC, Reuters, Investor's Business Daily and The Bond Buyer and has written articles for The New York Times, TheStreet.com, The Star-Ledger, The Record, Variety and Worth magazine. Bernice has a Bachelor of Science in Social Welfare from SUNY at Stony Brook.
