by Cynthia Harrington
Financial advisors are being squeezed on fees. Fees charged on assets under management have declined with equity prices. On the other side, advisors are being asked to provide more services, take on more liability for their advice and adjust all plans to suit the higher risk world that has existed since 9-11. Something has got to give.
"For the past decade, clients paid for financial planning basically through commissions or assets under management," said Ray Ferrara, CFP, ProVise Management Group LLC, Clearwater, Fla. "We gave away a lot of financial planning services under that arrangement. A client would ask us to analyze stock options or plan for their divorce or ask us to oversee assets in an IRA. But now there are too many clients asking for those services."
Not only do clients expect additional advice on their liquid assets but also the illiquid assets not officially "under management." "If we put ourselves out as full blown, fee-only advisors, then we have the duty to give feedback on all aspects of the client's financial life," declared Steven P. Kanaly, CFP, CTA, president, Kanaly Trust, Houston.
Kanaly Trust is an independent trust company offering financial planning and asset management services. The firm now bases the client relationship on a fee based on assets under management. "The hard part is anything beyond that. For many people, one-half to two-thirds of their net worth is non-domiciled," said Kanaly. "We're currently challenged on how to charge to manage the family's limited partnerships, or the family ranch or the vacation condo."
Ferrara expected his firm would be charging a fee based on total assets vs. assets under management within the next six months.
Not everyone is solving the problem of how to be compensated for other assets by including them in the fee base.
Stephen High, CPA, PFS, JD, chief manager, Kraft Asset Management LLC, Nashville, Tenn., said his firm focuses on the liquid assets under management. Clients pay an annual fee ranging from 0.7 percent to 1.85 percent on in-house assets. "We charge fees based on the value we add to the client relationship," explained High. "It's unfair to charge fees that are outside the realm of our expertise where we're not directly benefiting the client."
Another solution is to unbundle the pieces of what constitutes comprehensive financial planning and charge on a fee-for-service basis. High reported that few clients sign up for the total range of financial planning services offered through his division's parent company, Kraft CPAs. Their involvement in executing all aspects of a comprehensive plan overwhelms most clients. "We break down the planning process and clients get a separate engagement letter for making the plan, for implementing the plan and for managing the assets," said High. "We offer clients different services based on goals, like estate planning, retirement planning, tax planning, risk management or college planning. Many clients have hired us just to undertake an estate plan for them, for instance."
Nor do they try to offer all the necessary services under one roof.
"We see ourselves as the quarterback of the team that includes an insurance agent, the attorney, a trust company and sometimes a stockbroker," High explained. "Since most are already clients of our firm, we want to make sure that they get the value from the planning process in how all members of the team implement the plan."
Separating services is an oft-mentioned solution to the increasing complexity of financial advisory practices. Ferrara predicted his firm would unbundle services within the next six months. Kanaly expected that the entire profession will redefine "comprehensive" planning. "We're not just saying that we need to raise rates, but we're seeing that we have to go back to the beginning and question the fundamental definition of financial planning," he said.
Charging a client for specific tasks is one way to be paid for nonliquid assets. Historically, trust companies listed their charges for non-domiciled assets on an item-by-item basis. Kanaly said they provide a fee schedule for managing assets like real estate, oil and gas deals, cattle and aircraft. He's not convinced that this is the best way to handle charging for illiquid assets. "The client feels nickled and dimed and we're not being compensated for the ongoing work involved," he said. "Due diligence isn't a one-time thing with illiquid assets. It's a recurring task."
Due diligence means taking more time and it also implies greater liability for the financial advisor. Each investigation calls on in-depth knowledge of specific industries and the legal and tax issues involved. The increased liability should command a higher fee.
Planners also work harder because lifestyles are more complicated. Medical breakthroughs, multiple marriages and the 9/11 attacks affect each client's plan. Being aware of, and adapting to, those changes increases the risks for financial advisors. Kanaly gave an example of how their firm's advice changed after Sept 11. He said they used to calculate the amount of insurance a client needed and directed them to a single company to underwrite the coverage. "Now we advise a client to use multiple companies to spread the risk," he said. "And we need to do up-to-the-minute due diligence on each of those companies. A.M. Best ratings are helpful but an advisor would have to demonstrate more than the use of others' ratings in a court of law if the insurance company goes down."
Both Kanaly and Ferrara have contributed their time and expertise to the profession on the issue of compensation.
Ferrara is on the national board of the Financial Planning Association and chairs the committee charged with defining fair compensation methods. As chairman of the National Association of Personal Financial Advisors, Kanaly is working with other professional organizations to clarify the meaning of financial planning and to quantify its value. He also expects new legislation that helps employees get professional advice on one of the largest illiquid assets - qualified pension plans. "Employees need to be able to procure advice on these assets. The law needs to be changed to allow the plan to pay an advisor and not be disqualified," he said.
Many expect 2002 to be the year in which the compensation question is answered. "Planners are literally going to school as we speak," said Kanaly. "In the next six to nine months we hope to have this all figured out."
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