The Compensation Conversation

"A lot is uncertain," added Waldert. The move toward alternative fees — project fees, hourly fees, fees for financial plans — has slowed significantly though it was a burgeoning trend just 18 months ago. "The challenge is always getting the client to write the check. If you pull 1 percent out of a portfolio, they don't see that," he said. "In difficult times, if a client has to write a check for a $500 retainer when he's down 40 percent, that's a lot more challenging."

With a move to a universal fiduciary standard, Waldert says the ongoing trend toward a fee-based business model will only accelerate.

"Increasingly, what our numbers bear out is if you want extreme financial success, it's playing at the top end, it's fee-based compensation, it's taking on fewer and wealthier clients and it's providing more financial planning."

Even still, the bear market has also exposed the weakness in advisory fees as a sole source of compensation, according to Matt McGinness, principal of San Diego-based Best Practice Research.

"Advisors have been forced to come to grips with a weakness in a model where anything that drags down the AUM is going to impact their income. For most advisors, there's a fundamental misalignment between where the bulk of the work comes in the relationship and when they get paid," he said. "Plus, as the client ages and draws down his portfolio, the advisory fee comes down as well even though the work may be more intensive. The advisory fee isn't the perfect solution."

To that end, McGinness expects advisors to start looking seriously at charging financial planning fees and "advice" fees in addition to AUM charges. In fact, he says, advisory fees on assets may come down in favor of higher advice fees.

"What the market has revealed to most clients is that the value the advisor delivers isn't necessarily in asset management, but in the broader advice they provide. Those advisors who do nothing but manage the money are generally the ones who struggle the most," he added. "It's entirely possible that the dramatic events of the last year will push the broader themes of creating a compensation model that aligns revenue with expenses and also creates a compensation model that makes it easier to justify asset-based fees."

Tough Transition to Fiduciary Standard

Meanwhile, the immediate headline that will dominate the compensation conversation over the next months involves fiduciary reform. As The Wall Street Journal pointed out recently: "Fiduciary Duty Hits the Street — Sort Of."

It's the "sort of" part that's got the industry abuzz. At the moment, lobbyists are working Congress in an effort to influence what a fiduciary standard will look like. The outcome is anybody's guess, but it's generally believed that brokers will eventually be held to some such standard.

"Once health care is resolved and off the front burner, this is right up there — front and center," said Lou Harvey, president of Boston-based Dalbar, who has followed the saga as closely as anyone. "I would say there's a very good chance that by the end of this year, we're going to have a reconciliation of basically the two standards out there: the know-your-customer suitability standard on the brokers' side and the fiduciary standard on the investment advisors' side. What that means for compensation is you're going to be one or the other. You're either someone selling for a commission or you're going to be an advisor working for a fee."

In Harvey's opinion, choice will come at an institutional level. If Merrill Lynch or Morgan Stanley Smith Barney top brass decide to keep their advisory force in the traditional sales commission model, as an example, Harvey says the firms will package their business in some way — perhaps creating an RIA for their investment advisors and then selling that unit off to an independent broker-dealer.

"I suspect these firms will make an affirmative decision as to whether they want to be in the advisory business or not because that carries liability. That's the deep dark secret they never tell you," he says. "Being a fiduciary will jack their insurance premium through the roof."

Harvey says the transition to a fiduciary standard will be good long-term but will not come without short-term pain.

"You're going to have to go back to all your clients again, have them sign a new contract and you're going to have to answer the question again: 'Why did I lose money last year?' Depending on how the market comes back, it's hard work," he said. "Right now every advisor is viewed sort of with a 'Gee, is this guy here to help me or is he trying to generate a commission?' Once there's a clear standard, I think it will generate confidence and therefore more and more people will rely on financial advisors. It will dramatically expand the marketplace."