The HS Dent Financial Blog

RSS      

Bad News For Financial Advisors

This headline from Bloomberg should be rather disturbing to fee-based financial advisors, though it should certainly come as no surprise: “World Wealth Down 11%”

Bloomberg writes,

The 2008 global recession caused the first worldwide contraction in assets under management in nearly a decade, according to a study that found wealth dropped 11.7 percent to $92.4 trillion…  North America, particularly the United States, was the hardest hit region, reporting a 21.8 percent decline in wealth firms’ assets under management to $29.3 trillion, primarily because of the beating U.S. equities investments took in 2008.

This is bad news for financial advisors who get paid based on assets under management.  The shift in the industry from a focus on commission income to fee income has been an enormously beneficial change for clients.  Under a fee system based on assets under management, the advisor has every incentive to grow the client’s wealth in a conservative, sensible manner.  The incentive to create commissions from excessive portfolio churn or to sell clients high-load mutual funds is reduced.

The problem is that when the market falls, so does your income if you get paid based on a percentage of assets!  The Bloomberg story estimated that it would take six years for assets under management to return to 2007 levels, but no indication was given as to how they arrived at that number.  Is it based primarily on new assets gathered?  Or is it based on projected returns in the stock market?  Because if it is the latter, it could take substantially longer than six years if we have another bear market leg down.  Six years is a long time to wait for a pay raise…but what if it is ten years or longer?

It will be interesting to see if the fee-based model — which, again, is generally best for the client — survives this bear market, or if the old commission-based model makes a comeback.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy