Fee-based is the current buzz in the financial advisory business. Advisors everywhere are fleeing commissions for a seat on the fee bandwagon. The transition can be a rough ride, though, and not all advisors have what it takes to endure the journey, let alone flourish once they have arrived. How do you actually convert? If you do, what new services will you be able to offer clients? Will clients embrace the new “you?” Can you make sufficient money to survive? Do you even have a choice?
Ross Marino, a CFP and Raymond James Financial Services-affiliated advisor in Wilmington, North Carolina, knows many of the answers to those questions. A former stockbroker, Marino started getting “really aggressive” about his transition from commissions to fees four years ago. “It’s a lot of work, and you’re going to have a dip in income,” he says matter-of-factly. In the first year, his business fell by more than 50%. He was forced to jettison some clients. It took him 21/2 years to get back to where he started income-wise. He couldn’t be happier.
“There was no other option in my mind,” Marino says of what he considers his logical progression from broker to financial planner to wealth manager. “This is the best relationship structure with the client. It is the best long-term move for business, for ethics, and for being unbiased–I don’t know who can be unbiased if they’re being compensated by commissions. If they’re out there, God bless them. But fee is where the future is going.”
Frank Gleberman has been there, too. Gleberman is a CLU, CFP, and a principal of The Century Benefits Group with offices in Marino Del Rey and Los Angeles, California. When he made the shift from commission-based transactions to fee-based financial planning, he experienced “a little drop in income, maybe 10%,” at the end of the first year, and says he caught up during the second.
As with Marino, Gleberman says the desire for a higher income was not a driving factor, though he admits it is becoming a “nice outcome.” Instead, he made the leap for two critical reasons. First, much of his time was devoted to helping clients in areas having little to do with products, such as updating or obtaining wills and trusts; refinancing mortgages and other loans; advising clients on lifestyle and business issues, including succession planning; and helping with education issues for children. Second, Gleberman realized that asset classes within client portfolios often needed rebalancing and repositioning due to activity in the financial markets, not his own strokes of brilliance. He wanted to make portfolio adjustments in a way that wouldn’t result in unnecessary, let alone unearned, commission charges. “I wanted to be on the same side of the desk as my clients,” he says. Now he is.
Mark Schoenbeck, VP and director of the Advisory Services Department at Mutual Service Corp. in West Palm Beach, Florida, an independent broker/dealer that he says is big on helping its people “go fee,” sees advisors he works with actually increase their income during transition, especially when garnering assets to which they had no prior access. But the truth is that not all advisors experience successful transitions. And not all advisors are hell-bent on converting. Someone who has worked successfully in the commissioned-based advisory field for 15 or 20 years may opt to comfortably “ride it out” instead of transitioning, says Schoenbeck. Or as advisor Marino notes, “If they’re established and comfortable and making a living, why risk it?”
The “younger crowd,” however, is more in tune with the fee-based concept, feeling, as they are, the pinch of dwindling commissions. The average commission-based broker in 2001 saw his revenue drop about 25% to 27%, while the average fee-based broker was down about 7%, according to Brad Fryer, VP of advisory sales and marketing at LPL Financial Services in San Diego.
“They’re looking to grow and thrive, and to do that in today’s markets, you must be working in an advisory type of relationship,” Schoenbeck says. “You must bring a different value-added to the table.”
According to Cerulli Associates, a Boston-based research and consulting firm, about 11% of independent broker/dealers derive their revenue from fee-based services, though from firm to firm, adoption of fee-based pricing can vary from more than half of revenues to less than 5%. For example, revenue from fees on assets for Cambridge Investment Research and LPL Financial Services, both broker/dealers with a fee-based bias, is 30% and 44%, respectively. Cerulli believes that commission billing won’t disappear any time soon from the B/D world. For one thing, that’s because commission pricing, such as A shares, is such a cost effective means of working with smaller-net-worth investors. The 2001 report, “The State of the Independent and Insurance Broker/Dealer Industry,” adds that “even among the CFP membership only about one-quarter are fee-only.” But in general, the gospel of fees will continue to spread, as it already has with many broker/dealers, RIAs, and independent investment advisors and planners. For example, the trade group NAPFA (National Association of Personal Financial Planners), based in Buffalo Grove, Illinois, and with about 770 members nationwide, has since its inception in 1983 espoused the concept of fee-only in conjunction with objective, comprehensive financial planning, with no commissions whatsoever.
“We’ve seen a huge boom in fee-based assets,” says Schoenbeck, “but I don’t really think we’ve scratched the tip of the iceberg yet,” he says. Mutual Service CEO John Dixon notes that the company’s CLASS program, which is offered to the broker/dealer’s 1,600 reps, has amassed some $2.5 billion in assets and is “still growing.”Toss in fees on managed accounts, and the opportunities for fee-based converts are wondrous indeed.
What these data portend is both good and bad for advisors, depending upon how prepared they are for the brave new fee-based world, and how wedded they are to the old. High-net-worth clients are migrating to managed accounts because they no longer accept the limited services offered by financial-product salespeople and the off-the-rack investment advice they often provide. And advisors can no longer enjoy the scant competition they faced during the past decade, when a bull market made everyone look good and there was a greater supply of potential clients than advisors to serve them. Today, as HNWs, and the public in general, become increasingly savvy investors and aware of the commoditization of the financial services industry, they are demanding to know exactly what they’re getting for that 1% or 2% fee the financial advisor is pocketing for managing their assets.
Clients want even more than no-nonsense accountability. They want truly personalized service, a piece of your intellectual property, and they want you to be unique. It’s not enough to be a good golfer, and funny and honest and punctual. “Most advisors are out there sort of swimming in a pool of sameness,” says Terry Gronbeck-Jones, senior managing director of Pareto Systems (see “Enjoying the Spoils” sidebar) and Duncan MacPherson & Associates, both in Ottawa, Canada. “Clients are starting to compare one advisor to another, which they didn’t often do before.” Pareto Systems, named after an Italian economist and based on the principle that in every business 80% of one’s livelihood derives from 20% of the customer base, is a business development and contact management program designed for financial advisors focused on growing their businesses. The program was developed by Duncan MacPherson and Associates, a consulting firm specializing in marketing and business development.
How you differentiate yourself from other advisors–whether you’ve billed yourself as an investment manager or comprehensive planner or both–is a function of your readiness to shed commission personas and sales models for those that give more than lip service to the philosophy and practice of fees. As MacPherson & Associates President Duncan MacPherson says, “it’s hard to charge a fee when you’re perceived as a salesperson.”
Not So Fast
At first glance, bringing to the table what clients are coming to expect from a fee-based advisor would seem simple enough. As Gronbeck-Jones points out, there’s nothing new about transitioning–RIAs pioneered the concept ten years ago, he says–and most advisors are fairly clear on what they should be doing. “The problem is that it’s easy to conceptualize about but hard to put into play when you’re back in the office running a business,” he says. “The law of diminishing intent takes over.” The result is that not as many advisors convert as could, and when they try, they tend to approach what is a deceptively complex subject with a naive, simplistic plan.
Two “glaring holes” Gronbeck-Jones encounters regularly are the lack of a documented, structured system of service delivery, and a financial planning process that, as MacPherson puts it, “reflects the dynamic and fluid nature of clients’ financial lives.” The result is that interactions with clients aren’t very productive.
“The client leaves the advisor’s office going, ‘What was that all about?’ Well, is there a story the client can follow? Is there a process the advisor can recreate?” says Gronbeck-Jones. Too many advisors, he feels, lack any kind of process that would enable advisor and client to see at a glance where they’ve been, where they are, and where they’re going. The client should come away from the first advisor meeting with a complete understanding of short- and long-term goals, along with what it will cost to get him there, and what each step of the journey will likely entail. “I’d say eight out of ten people don’t come away with much of this at all,” he notes. Other things to keep in mind: Keep it simple. Remove the mystique. Unbundle the fee, show what percent is going to the advisor, what portion to the money manager. He suggests that new fee-based advisors pick out a couple of target markets and master them. “Don’t try to be all things to all people.”
But do know where you’re going. At Mutual Services, Schoenbeck has transitioning advisors define the value and vision of their practices, around which marketing literature and pieces subsequently can be developed to share with old clients and attract new ones. He starts by having advisors “take a step backwards,” helping them take stock of “who they are,” and pinpointing unique offerings they possess that can be brought to the client relationship while formulating ways to effectively articulate these offerings to the client.
Are You Worthy?
MacPherson says transitioning advisors must ask themselves, “Am I fee worthy?” In other words, they must identify if they are providing clients with the necessary level of service and professionalism to justify charging clients a set fee or retainer for their services. Oddly, many transitioning advisors don’t consider themselves worthy: they lack confidence. Gronbeck-Jones says they are “scared” to make that transition because “deep down they don’t believe in what they’re providing, and don’t think their clients value what they do” either. Other advisors halt their transitioning efforts mid-stream because, as Schoenbeck notes, they are worried their client is going to “laugh them out of the office, saying, ‘You’re kidding? Now you’re going to charge me a fee?’”
But the majority of clients are not thinking this at all, Schoenbeck maintains, and are disinclined to balk at a change in business model. He cites an example of an advisor going through the transitioning process with Mutual Service, who over a two-month period spoke to 20 of his existing clients about his intent to go fee. Only one client put up a fight. Fryer at LPL Financial Services (see “The LPL Way” sidebar), says that 95% to 98% of LPL clients make the “leap of faith off the commission ledge into the fee-based pool” with their transitioning advisors. Both Schoenbeck and Fryer believe the reason most of these clients have stayed with most of these advisors for as long as they have in a commission-driven model is because of the relationship, not because of performance or because they’re necessarily selling the best product.
To bolster confidence and alter mindsets–the latter a major obstacle, since many commission advisors naturally see themselves as salespersons–Schoenbeck has advisors list the myriad tasks they perform on a daily basis. It doesn’t take long, he says, before these advisors realize that they are, in fact, providing valuable services to their clients, and need to be fairly compensated for their work like any other professional. “When you sit down to show them how much they’re making per client per hour, they’re shocked to see that for the most part they’ve been giving away their services for a long time,” Schoenbeck says.
While too little confidence can quickly sabotage even a well-designed transitioning effort, a lot of confidence can go a long, long way. Advisor Frank Gle- berman was quick to discover that fee-based services put him on the same compensation basis as his clients’ attorneys, CPAs, and physicians. The attitude adjustment that comes with transitioning seems to make advisors more proactive with clients as well. Gleberman says there have been several cases when he has called a client, asking him to come to his office as soon as possible. The conversation might go like this, he says. “You’re paying me for advice and you need to take advantage of rebalancing and upgrading your assets in three specific asset classes. I don’t want you paying additional fees to have pages and pages of written explanation prepared and mailed out to you that can be covered in an hour’s lunch meeting in my office.” Gleberman allows that this “may seem a little bit harsh,” but that he has yet to be refused.
It’s important, too, for newly-transitioned advisors to not overlook intangible add-ons, Schoenbeck cautions. These include simple things such as having a human being answer the office phone, and returning calls within 24 hours. If the advisor knows his client’s favorite drink is Dr. Pepper, for example, Dr. Pepper should be on the table at the next client meeting. Transitioning advisors should also exercise patience. Change can be hard and frustrating, and you don’t learn it in a one-day workshop, maintains Schoenbeck, whose company runs intensive, long-term training programs. He finds it generally takes advisors six to nine months to get going with their new system. It then takes another year to reach a point where they’ve got their top clients on board, and from an asset-level standpoint are realizing significant recurring revenue. LPL’s Fryer finds the “crossover point” with his transitioning advisors to be somewhere around the three-year mark.