The goal of most financial advisors is to work with fewer clients, make more money, and have less work to do. The industry push has been to outsource everything except the client face time. Even client face time is minimal in many practices. The climb to higher riches for financial advisors is typically a battle of persistence and attrition. The longer that an advisor is in business, the greater the potential for business based on accumulated trails, repeat product sales, retention bonuses, and the occasional inheritance of an orphaned book of business.
Welcome to income compression. This is a phenomenon that is happening in many industries due to the dramatic minimum wage increases. The minimum wage increase impacts staffing costs and entry-level compensation needs, but the financial services industry also has to deal with the DOL Fiduciary Rule which, among other things, requires “fair and reasonable” compensation.
Is it reasonable for an advisor to charge a 1% fee to their client’s account? Per the SEC, it would be very reasonable as long as the advisor was not reverse churning. Per the DOL…. Not so fast. What is the client getting in value for that 1% fee? Assume the client has a $1,000,000 account. That’s $10,000 a year in fees. Assume the advisor spends ten hours a year in time dedicated just to this client. That’s $1,000 an hour to cover expenses and time. Compare that with most estate planning attorneys and CPAs who (depending on where someone lives) charge between $250 and $550 an hour for very technical and sophisticated advice, and most have far more stringent educational requirements than financial advisors do.
An advisor may no longer be able to justify such high incomes when comparing the amount of work or limited sophistication to fees. This will likely drive financial advisors into salary-based or hourly-based compensation arrangements with their firms. The DOL Fiduciary Rule will have a limiting effect on the income growth of financial advisors.
The real wealth creator of the future for financial advisors will be in firm equity plans. No longer a game of luck, the advisors who accumulate the most wealth will be those who work for, buy into, and contribute to a firm that has great management, growth, and people.