Despite difficult economic conditions, more banking companies remain interested in generating fees for offering financial advice, rather than generating commission on selling investment products.
"Instead of selling products, they're trying to build relationships" with retail clients, said Lynn Niedermeier, the president and chief executive of the Tampa brokerage service provider Invest Financial Corp.
Banks that win their clients' confidence have a better chance of gathering assets away from rivals, she said.
So far banks have had some success pulling in more fee-related business, but they still have a ways to go. Last year they generated 6.7% of their revenue from managed money fees, as opposed to transaction commissions, according to Kenneth Kehrer, the director of the Princeton, N.J., research and consulting firm Kehrer-Limra. In 2006 the percentage was only 4.7%, though it had crawled up steadily in previous years.
"It's happening way too slowly," Mr. Kehrer said.
Advisers make less money in the short run from starting an investment advisory business that earns fees on assets instead of sales, he said; the strategy pays off later, but it can be tough for banks to take during difficult economic periods.
Despite the challenges, bankers say they are doing what they can to encourage advisers to move away from a sales-oriented business model.
Brian Lucareli, the director of wealth advisory services at Johnson Bank, a Racine, Wis., said it is reviewing the way it compensates its advisers to make sure it is in line with industry practices. The Johnson Financial Group Inc. unit began this process in April. One purpose is to make sure that advisers are getting competitive compensation, he said; another is to build its fee-based offering on the brokerage side.
"We want to build our compensation models around a philosophy of being client-centric," Mr. Lucareli said.
Early last month First Tennessee Bank in Memphis started allowing clients to choose between paying a fee or a sales commission for financial advisory services. The First Horizon National Corp. unit has continued its practice of paying advisers a percentage of the sales that they bring in, but it also has been trying to increase its fee-based business since 2002, when it began to offer an array of products through the Boston financial advisory services provider FundQuest Inc.
At this point First Tennessee gets around 85% of its advisory revenue from commissions and 15% from fee-based products.
"Clients would prefer to pay a fee, because they want the company they're doing business with to have skin in the game, as well," said Rhomes Aur, director of wealth management at First Tennessee.
Some firms are already reporting a payoff from this strategy.
Hancock Investments Services Inc. in Baton Rouge, which had been compensating its advisers mainly through commissions on trades, started charging its clients flat fees a few years ago. To make it easier for advisers to make the switch, the Hancock Holding Co. subsidiary pays annual fees to its advisers a year in advance and then collects the money back from its clients on a monthly basis.
This year more than 55% of Hancock Investments' new assets have come from customers who wanted to pay fees instead of commissions, versus around 40% a year ago.
Hancock Investments, which typically gets around $5 million of new assets a month, pulled in between $9 million and $10 million last month. "Clients were dissatisfied with where their money was, and they liked this [compensation] arrangement better," said Randy Bluth, the unit's president.
It continues to move away from its roots as a sales organization by trying to recruit people who can provide investment management services, such as certified financial planners. Around five years ago, Mr. Bluth said, it was more interested in recruiting people who had only brokerage experience.
Mr. Kehrer said more banks will look to switch to fee-based platforms, but "how quickly" they do so "is hard to say."
