For the last 20 years, the securities industry has considered fees over commissions to be the savior of its cyclical business.  The fee-based advisors we talk to tell us that their income will be down 50% this year–most of that is due to a 40% decline in the value of client portfolios and the rest from clients who closed their accounts.

The brokerage industry always seeks a magic bullet to insulate its revenue stream from the markets and it looks like the fee based model has its flaws as the single solution.

Our thoughts are as follows.

Investment professionals who interact with retail clients do not manage portfolios, they manage relationships.  As such, you need to be a psychologist much more than a “financial” advisor.  People hate volatility–it messes with their psychology.  So the first order of business is to ALWAYS build balanced portfolios.  Yes, we all know that your clients will make more over time if they have 100% equities.  The only problem is they won’t be your clients very long because there are few investors that can tolerate the volatility of a simple S&P 500 Index fund.   By having a healthy dose (e.g. 50%) of fixed income instruments in their portfolios, you will retain clients in down markets.  The public is much more sensitive to pain (i.e. losing money) than they are to pleasure (making money).  You won’t lose clients if the market is up 20% and the client only sees a 12% gain in their account.

Additionally, you will keep clients if they understand the model for their portfolio.  If you hand the money off to a third party manager who says they analyze stocks and make buy and sell decisions based on their “brilliant analysis,” you have a problem.  The client does not understand the model being used to manage their money.  But if you use a model they can understand and explain it annually (they will forget unless you repeat it), they will never leave.  Such models would be the Dow Dividend strategy, the S&P 5 star portfolio, the Value Line #1 ranked stocks, etc.  These are easy to explain and understand models that are transparent.  Once your client buys into the sense of the model, you are no longer responsible for performance because they agreed that the model makes perfect sense.  You just need to remind them annually how the model works and have them agree again that it makes a lot of sense to manage their portfolio in that fashion.  Next time you lose a client, ask yourself, “Did they understand how their portfolio was managed or was it an uncertain black box to them?”

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