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When Commissions Serve Clients Best

By Murray Coleman September 22, 2014

Financial advisors like to say they push services, not products. So asking clients to pay commissions to trade stocks and bonds smacks to some of promoting portfolio churn over the true planner’s commitment to provide patient, long-term investing advice.

Still, close to 30% of all U.S. advisors take a hybrid approach by charging clients commissions and fees on assets, according to a new study by Aite Group. The Boston-based consultancy estimates those offering a single payment method are almost deadlocked at around 24% apiece, with the remainder billing by the hour or charging retainers.

Some in the financial-advice industry rail against “commissions in the name of looking out for a client’s best interests,” says Jim Gambaccini, managing partner at Acorn Financial Services, a firm in Reston, Va., with $500 million under management. “But the reality is that when advisors have access to both worlds, it truly opens up what they can do for people.”

David Millican of Atlanta Capital Group agrees. He says clients with concentrated stock positions make prime commission candidates. He tells of a retired communications executive who recently came to him with a $10 million portfolio, about half of which was in stock of her former employer. Instead of selling those shares at once, Millican suggested she reduce her exposure over several years to avoid a large one-time tax bill. And he suggested that those sales be subject to commissions, unlike the rest of her holdings — which would save the client more than $100,000 over five years.

“An advisor who didn’t have that type of flexibility would essentially be charging management fees for little more than overseeing a gradual divestiture of one large concentrated position,” says Millican, whose firm manages about $1.6 billion and has about 75% of its clients’ assets in fee-based programs.

Alternative investments can also be good places for commission business, says Acorn’s Gambaccini, who estimates 70% of his firm’s assets are fee-based. For example, he recently suggested a prospect make a so-called 1031 exchange for a building. This structure allows owners to swap real estate holdings, deferring taxes until a property is actually sold.

James Gambaccini

But an advisor with whom the prospect was already working had told him to dump his real estate — taking a tax hit of nearly $2 million in the process — and put the proceeds in a fee-based account. Gambaccini provided cost estimates of both strategies. Besides avoiding a big initial tax bite, his idea for a 1031 exchange would let the prospect generate as much as $170,000 a year in rent-related income by staying in real estate.

That prospect is now a client, according to Gambaccini. “The other advisor was just looking at the situation as an opportunity to get 1% a year forever by putting him into a fee-based account,” he says.

Small-business owners can also benefit from advisors who mix and match billing methods, says Dan Wagner, president of Wagner Wealth Management in Greenville, S.C., a firm that manages $260 million. While most of his clients pay management fees, he finds that entrepreneurs can shave costs with so-called solo 401(k) plans. Some solo plans can accept asset transfers from other qualified retirement accounts such as IRAs, Wagner says. By combining assets in one place, his clients can buy lower-cost share classes of a plan’s mutual funds, which, he says, makes paying a sales load more palatable.

“The numbers don’t lie,” he says. “It’s pretty easy to lay out to clients just how much they’d pay in commissions as compared to fees. Advisors who don’t have the ability to use both are doing a disservice to their clients as well as their own practices.”