Hotels and airlines are doing it. Banks and credit-card companies are doing it. Now financial advisers, too, are looking to boost their revenue by adding services and changing how they charge clients.
With profits falling in the wake of the 2008 market tumble, advisers are working to add more clients, charging hourly fees for some services, taking on one-time “projects” and, in some cases, selling commission-based products.
That isn’t all necessarily bad—you may well feel the need for more planning or tax services. But you should be wary if your adviser is pushing new services or offering new products that might pay heftier commissions, like mutual funds with loads or various kinds of insurance, which may pay hefty commissions.
For example, there was “a gentle step up” in new sales of variable annuities in the fourth quarter, says Bing Waldert, a director at Cerulli Associates, a Boston research firm. Variable annuities are a tax-advantaged form of mutual-fund investing that have been criticized for their complexity, high fees and generous commissions. Many of them come with guarantees of lifetime payments that provided security and solace for investors when portfolios were rapidly shrinking during the stock-market slide.
Though the stock-market decline hammered investor portfolios, the revenue of independent investment advisers was flat in 2008 compared with 2007 and is expected to be flat or only slightly down in 2009 because firms took on more clients, says Matt McGinness, a principal of Best Practice Research, which conducts the annual Moss Adams/InvestmentNews survey of adviser compensation.
Over the past five years, the industry has gradually moved away from commissions and toward relying more on fees tied to clients’ investments, which worked well when the stock-market was rising. Now, even though asset values have rebounded over the past year, advisers are rethinking their business model.
“We all were pretty dependent on the value of assets under management,” says Diahann Lassus, a financial planner in New Providence, N.J. Ms. Lassus, who charges a fee equal to 0.9% of assets invested, raised her minimum annual fee last year to $10,000 from $7,000, a change that mostly affected clients with $1 million or less invested.
As a result, some advisers are beginning to charge separately for broader financial planning advice, such as assessing insurance needs, tax issues and strategies for managing debt and mortgages—
services that go beyond saving and investing. June Schroeder of Liberty Financial Group in Elm Grove, Wis., says her firm is seeing more clients on an hourly basis and adding some tax-preparation services that it didn’t offer before.
With advisers seeking new clients, the downturn could be a chance to cut a deal with a new adviser. Many firms require minimum investments of $500,000, though that may be waived to attract new business.
Shop around, since fees can vary from as little as 0.25% to 1.5% of your assets under management, depending on the services offered and the size of your portfolio, and minimum charges can vary widely as well. Advisers’ fees may be negotiable, so ask detailed questions about them and about other expenses, including investment-related fees and what commissions the adviser may receive for selling investment and insurance products.
Just as important, be sure you and your adviser agree on your goals and the investment strategies for meeting them. Some advisers use only mutual funds and exchange-traded funds, others use separately managed accounts that are supposed to be tailored to your investment and tax needs, and still others buy stocks and bonds themselves. You will want to know whether all clients get essentially the same portfolio and how much say you will have in your specific investments.