In my role as chief business development officer at Commonwealth, I’m always looking for trends that can lead to new clients, prospects and AUM for our advisers. One area I’m watching closely is the growth in fee-only advisers.
Fee-only advisers have been increasing at a rapid rate. From 2011 to 2020, the number of firms registered with the Financial Industry Regulatory Authority Inc. decreased 23%, while investment adviser-only firms increased 21%, according to Finra’s 2021 Industry Snapshot. That’s a swing of 44% in one decade.
The trend toward fee-only is clear, but it’s hard to tell which is the chicken or the egg in this scenario. Did client demand for fiduciary, fee-only advisers lead to more advisers changing their business models? Or did advisers who wanted to run a completely fiduciary practice do such a great job telling their stories that clients chose them?
Because there are many different variations of fee-only — specifics related to the certified financial planner designation come to mind — let me clarify what I mean by the term. Fee-only differs from fee-based because advisers serve as a true fiduciary in every aspect of their practice; compensation is 100% derived from AUM and planning advisory fees. Adjustments to the Labor Department’s fiduciary rule several years ago hastened the move to fee-only for some advisers, and the barrage of publicity since has fueled the trend.
Although we won’t know the exact numbers until year-end, fee-only advisers are tracking at a sizzling pace at Commonwealth. Through the third quarter of 2021, the median growth rate is an impressive 24% (with an average growth rate of 34%) for fee-only advisers. That’s an astonishing number, especially when you consider the pandemic as a backdrop. In my discussions with fee-only advisers, many cite the following as reasons for their breakthrough growth:
Clients and prospects are searching for a fiduciary. Prospects are looking for an adviser who is a fiduciary, and people are screening for the term even if they aren’t quite sure what it means. One adviser in Rhode Island told me that 40% of her new business this year came from online searches for “fiduciary fee-only adviser.”
Advisers like having a simpler story to tell. The financial services industry can be guilty of using jargon. Words and phrases that your prospects aren’t familiar with don’t make you sound smarter; they make it harder for prospects to decide. Telling people you’re a true fiduciary makes the story simple for advisers to tell and for prospects to understand.
Clients are giving more referrals. When advisers move to a fee-only practice, they have a powerful story to tell. After reaching out to inform clients of the change, advisers are finding that they respond well to it — and often take the opportunity to refer friends they think their adviser can help.
Fee-only advisers charge more in fees. Compared with the industry at large and Commonwealth advisers overall, our fee-only advisers charge more in fees. Perhaps they feel more confident in their value proposition and what they deliver to clients, or maybe clients are willing to pay for someone who they know will act only in their best interests.
Although a move to fee-only isn’t right for every adviser or client, the trend is unmistakable. If you’ve been thinking about a move to fee-only, answering these questions can help get you started:
• Do you derive more than 95% of your revenue from AUM and planning fees?
• Has it been at least three years since you sold a commissionable product?
• Have you asked existing fee-only advisers about their experiences?
• Do you think clients and prospects would like to know that you are a fiduciary to them in all aspects of your practice?
•Have you had discussions with others in your firm about a move to fee-only?
The more “yes” answers you have to these questions, the more likely it might be that going fee-only is a fit for your practice. As you work on business plans and goals for 2022, think about where you’d like to see your business in three to five years, and plan accordingly.
Kristine McManus serves as vice president and chief business development officer at Commonwealth Financial Network.
Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.