For Paul Stetter, an adviser at Fulton Financial Corp. in Lancaster, Pa., moving to a fee-based advisory business was a no-brainer.
The 38-year-old adviser "didn't want to wind up at 55 working the same way I've been working for the past four years," starting from zero each month.
In nearly four years as an adviser and two with access to fee-based products, Stetter's business has become 30% fee-based, and he is looking to hire a junior broker to take over his transaction accounts. Stetter's goal is to have 50% fee-based business by yearend.
This progress is remarkable considering that, four years ago, Stetter was the head of Fulton Bank's retail division. Though it is possible for commercial bankers to pull in nice bonuses, Stetter was frustrated.
"I loved my clients, but I just felt I couldn't make a name for myself working in commercial lending," he said. "I wanted more control over my destiny." He considered quitting banking to study dentistry. But his wife, who had just given birth to the couple's second son, persuaded him it was not the right time to go back to school.
Stetter had a plan B: to become an adviser. Working with individual clients appeared more satisfying than lending money to companies, and as a commercial banker, he had worked off and on with a Fulton senior adviser, John Holmes, who wanted to transfer his book to a junior partner.
Stetter was hired as a junior broker by Fulton Financial Advisors in October 2005 and was soon outproducing his mentor. He became an adviser in January 2006 and produced $850,000 in transactions that year.
When managed accounts were added to the lineup in 2007, Stetter produced $799,000 as he started to move the first of his clients to fees. In 2008, he pulled in $650,000 in volume despite the swooning markets. He had a 19% revenue decline from 2007 to 2008 but this year was at $617,000 as of Aug. 31, despite a falloff in fee business caused by recession-depleted assets.
Of his $55 million in assets, roughly $20 million is either earning fees or trails from mutual funds and annuities.
Stetter is a self-taught fee-based adviser. His mentor, Holmes, mostly sold one type of fixed annuity, a few different variable annuities and a handful of broad-based mutual funds, all transaction-based. "He was 62, three years from retirement, and had no incentive to go fee-based," Stetter said. But change was around the corner, and in May 2007, Fulton advisers got the option to sell fee-based accounts.
This was good news to Stetter, who said he found transactions an unsatisfying and stilted way to make money. He preferred a financial planner's consultative approach, being paid a percentage of assets to oversee his clients' fortunes.
As a Raymond James Financial Inc. rep, Stetter uses the firm's Freedom managed portfolios, to which he adds noncorrelated assets, such as real estate investment trusts, managed futures or commodities to help stabilize performance. By outsourcing much of the actual asset management, he found he could bring the same level of products and services to clients with relatively small accounts.
"Most of my clients in the $250,000 range have never even had noncorrelated assets proposed to them," Stetter said. "But I'll take $50,000 or $75,000 and spin it off into alternative asset classes, which has helped me win some accounts."
Indeed, some more seasoned advisers are now adopting the idea of bringing the mass affluent into the fee world by including noncorrelated assets in their pitches. "From a differentiation standpoint, it's rare to find noncorrelated assets offered at the sub-$250,000 level," Stetter said.
He was able to bring some of his commercial clients over to the advisory side, mostly retirement plans, a couple of 401(k) plans and a few SEP IRAs for small-business owners. But Stetter said he believes that his experience on the bank side helps him more in attracting investment prospects. "I've done hundreds of mortgages," he said. "I can't sell these anymore, but I can discuss them. There is value in what I provide."
He is still converting many of his predecessor's clients to fees, and this can be challenging. When a client's variable annuity recently matured, he could not see why he should pay Stetter's fee (1.5% of assets under management) when he could earn 2% investing in a certificate of deposit with no fee. But Stetter successfully argued that, if inflation were factored in, the money invested in a CD might not grow at all in real terms. Paying Stetter to manage his money could make it last a lot longer. The client relented, and Stetter moved his $100,000 into a Freedom fund that is half bonds and half equities.
Overall, Stetter was down 25% to 30% last year, in line with the market, but many of his old fixed annuity customers didn't lose a penny. He is now finding appetite for another fixed-income product — the oft-maligned indexed annuity.
"They're just a piece of the portfolio, but so far this year, they've done very well," he said. "I describe them to clients as 'non-greedy' products — you'll get some return, but mostly they just keep your money safe."
Stetter has 1,500 clients, many with accounts as small as $10,000. On his roster, 200 to 300 are wealthy, and his average client has $250,000 of assets. He hopes that by working with the top 300 he will double his average account size. He would then give smaller accounts to his assistant, who recently earned her Series 7 and 66 licenses.
In the next six months or so, he plans to hire a junior rep. Stetter is segmenting first by account size. His assistant will probably wind up handling his sub-$25,000 accounts, and the junior rep would take over accounts under $150,000. "I'll concentrate on anything above that," he said.
To further speed the transition to fees, Stetter is increasingly asking his fee-paying clients for referrals. A wholesaler advised Stetter to ask for referrals in between the client review and follow-up.
At that point, "I pick up the phone and say, 'I'm looking to work with clients just like you. Do you know anyone who might need my help?' " he said. At scheduled meetings, clients are focused on themselves and may find it jarring if their adviser prods them for a business lead, but a request for a referral as part of a meeting reminder comes across as less intrusive.
Stetter also gets referrals from commercial bankers — more than other advisers at the bank because of his background — but this is no guarantee; his former colleagues are still somewhat wary of his short tenure as an adviser. Nevertheless, he closes 80% to 85% of the business referred to him.
Though he is making progress, Stetter's business is not quite where he would like it to be. "I don't have many $1 million clients yet," he said. "But now [that] I'm on track, I plan to be even more aggressive next year."