I don't think it happened overnight. It was more of an evolution: Commission somehow has become a dirty word. It's now said in muffled tones within dark rooms, along with that other bad word: stockbroker. It's like your SAT analogies all over again: Commission is to fee as stockbroker is to financial advisor. (Or financial consultant.)

Okay, I'm being a bit cynical. But somewhere along the line, an advisor's value rose along with the percentage of business based on fees. In recent months, I've seen significant hirings put at risk because the interviewees were mere stockbrokers. In other words, they had the temerity to charge commissions instead of fees.

But of all the characteristics used to judge an advisor's book, none is more misleading than the overall term "fee-based." The truth is that there are many different types of fee-based accounts. Advisors can have their business in any one—or in any combination—of the following types of accounts: A wrap account that places money with outside money managers; a mutual fund wrap account; a commission replacement for a fee account; or with a discretionary advisor as the manager account. There are also exchange-traded fund wrap programs and "C" share mutual funds being sold, and all of these fall under the overall fee-based umbrella. The latest, of course, is the advisory account, where, on a nondiscretionary basis, the client is paying a flat fee for trading and advice.

The inescapable fact is that an advisor's business is worth more in today's marketplace if a higher percentage of the revenue is generated from fees. There is some logic here. Firms like fee-based business because the revenue stream is predictable. If an advisor has $100 million in assets under management and charges a 1% fee, the book generates $1 million. Simple math, even for this English major. The business will likely not have as many compliance issues as a transactional business because the investment decisions are outsourced. The advisor is not truly managing the money, and is no longer the stockbroker. More to the point, the advisor is no longer selling, as if selling were as dirty a word as stockbroker.

But I don't think that this is the most effective way to judge the worth of an advisor's business. In recruiting, the value of the book should be based upon the business generated at the old firm and whether that business can successfully move to the new firm. I've seen numerous deals where a fee-based advisor was not nearly as successful at transferring his business as the hiring firm hoped.

An unintended consequence of this trend toward fee-based business is the commoditization of the services of those deemed "most desirable." An advisor selling the acumen of outside money managers as the core of his business is vulnerable to price competition.

Consider this example: It's Friday afternoon, and a fee-based advisor resigns. During negotiations with her new firm, an evaluation rated her worthy of the best deal possible. The hiring firm was seduced by the promise of assets delivering recurring fees—a promise that, as it happens, she will be unable to fulfill. She begins calling her clients. At the same time, former colleagues get on the phone with more of her clients and promise the same level of service, the same selection of money managers, for a 25% to 50% reduction in price. The result? The advisor fails to deliver the promised business to her new firm.

What went wrong? The advisor thought her relationships were strong. When asked, virtually all of her clients said that they liked her and appreciated her service. But she had not differentiated herself from the pack. Someone else was actually delivering the good performance; she was just the intermediary. After her resignation, her colleagues made this point again and again with her clients, promising to continue delivering the same service at a discounted rate. The departing advisor may have ended up taking many of her accounts, but she'll have left a bunch behind as well.

The Advice of Advisors

The New York Yankees' Alex Rodriguez makes an extraordinary amount of money for hitting a baseball better than anyone (something this Mets fan acknowledges with grudging respect). The scout who discovered him makes a fraction of that. The team's general manager, who puts the players together, makes a fraction of what those players make. In other words, those who can perform are worth a lot more than those who merely select those doing the performing.