The Brokerage Industry

This is a conversation I had about the brokerage industry:

N: A lot of folks are deeply concerned about income accounts ... they're talking about challenging it's gonna be to do fee-based accounts for people in the income distribution mode ... basically, fee-based accounts are not practical for people living off their assets .

S: That's not good from the client perspective, it seems

N: Right ... the clients ask things like: why am I paying you 10 grand a year ... that I could spend on myself?

S: yeah, big time. think about what percent of your annual income that 1-2 percent represents
N: right! ... and the advisors want to do the right thing, too
S: as they should
N: So what is the right thing? That's what they're trying to figure out
S: yeah, good question.
N: because ... these accounts do take time to service ... In fact, maybe more time than wealth accumulation accounts
S: Fee for service, it seems?
N: ... right, some kind of retainer, maybe ... but the brokerage world is still stuck in the product mode if they can't tie a product around something, they don't focus on it
S: don't the really big accounts actually underwrite those distribution accounts?
N: hmmm, probably. But these distribution accounts aren't necessarily small.
S: yeah, that's bad.
N: And the advisors are caught in between... but, basically they're saying, you can't take a cookie-cutter approach ... it can't be all fees all the time. But advisors tend to focus on what pays them, like anyone else, so if there is no product commission or asset-based fee, they feel less confident charging purely for doing an estate plan, say.
S: here's an interesting question ... seems to me that the goal or outcome of the switch to fees is a drive by the advisor to be as efficient as possible with any account, thereby realizing, in some cases, an extremely high hourly rate when total time spent on account is analyzed on an hourly rate.
N: ahh, right
S: So it begs the question, though, at what hourly rate is the advisor actually getting way more than he should or anyone would agree is fair.
N: right
S: what's a fair rate and profit level.
N: and the SEC is sorta cracking down now on fee-based brokerage accounts ... I think it's the SEC ... because they don't do enough transactions.
S: yeah
N: So they're focusing on transactions, which is so lame
Sean: Back to 1999 ... my frame of reference!
N: but this industry is squarely caught between professionalism and sales ... the CPAs all envy the brokers!
S: It's true. So the question is, what profession has actually worked this out.
N: Because they can spend two minutes (exaggeration) on an account and earn an asset-based fee
S: right
N: 10 grand ... so there's no connection between what they DO, and what they get paid
S: Right. If i bring over a $10 million account and you bring over a $2 million account, I'd bet most advisors are going to run us through the exact same process and time allocations.
S: how is that fair?
N: right! it's like the realtor who spends five minutes, and earns 25K . You can make disporportionately high returns in sales
S: yeah
N: And there's no fiduciary duty ...