A wave of change is transforming the financial services profession. Increasingly, financial professionals are choosing to be compensated, partly or wholly, through fees rather than through commissions.
This is a real change from the old status quo. In the past, compensation usually resulted from product sales. A client opened up an investment, and the broker who “sold” that investment received a commission. The more informed an investor was, the more he or she tended to be cynical about this arrangement. It was all too easy for a client to regard the registered representative on the other side of the table as a salesperson, rather than an advisor.
The presence of commissions also created the potential for conflicts of interest. While ethical standards demanded that the representative suggest investments suitable for the client, certain investments could mean a larger commission for the representative than others.
It must also be noted that this is not as simple as “fees good, commissions bad.” In some cases, an investor may be better served when a financial professional is compensated largely through commissions, or a mix of fees and commissions. In terms of services rendered, that kind of arrangement may be more cost-effective for the client.
On the whole, though, the profession is moving toward a fee-based business model. In this compensation structure, a representative is paid mostly in fees that equal a small percentage of client assets under management. In addition, he or she may charge hourly or per-project fees.
At Kendall Capital, we have used the fee-based model since day one. We believe that our interests and our client’s interests are much better aligned through a fee-based structure. We are also fiduciaries which requires us to make investment decisions without the influence of commissions.
The new Department of Labor (DOL) retirement account rule is encouraging the shift. DOL’s new rule requires all financial professionals who consult IRA owners or participants in the workplace retirement plans to abide by the fiduciary standard. Beginning in 2017 (2018, for IRAs), financial professionals and their firms will be asked to commit to that standard (with certain exceptions).
Kendall Capital as well as many fee-only and fee-based financial practitioners already abide by a fiduciary standard. Those who work under the fiduciary standard have an ethical and legal obligation to put the client’s interests ahead of their own.
Many more financial professionals could soon be fee-based. Kendall Capital is part of a small percentage of Registered Investment Advisors that are fee-only, meaning that we earn 100% of our income in fees. The DOL rule change is helping to push the industry in this direction, as well as making client relationships a priority.
In a fee-based or fee-only relationship, the emphasis is on financial guidance and investment management rather than product sales. Kendall Capital’s fees are based on account values, creating an environment where we and the client want the account to grow. Therefore, our interests are closely aligned with our clients; we view our clients as partners in the effort to build and sustain their invested assets under management.
Our business is relationship-oriented; it must be for mutual success. Increasingly, financial services industry professionals are operating fee-based or fee-only practices with the goal of enhancing existing client relationships and forging new ones. You might say Kendall Capital has been ahead of the curve for years.