Your Broker-Dealer Can Help With The Transition To A Fee-Based Practice

By Carolyn A. Jergens

Most financial advisors say their job is most rewarding when theyre working closely with clients, analyzing individual situations and advising them on the best solutions to achieve their financial goals.

Too often, however, this ideal must be sacrificed in the daily hunt for commissions, as advisors spend more time prospecting for new business than counseling their existing clients. There is a better way, and as youll see, working with a top-notch broker-dealer may be the best way to get there.

Fee-based business is a trend that has been gaining popularity over the past decade because it can help financial advisors realize what they originally aspired to do–give financial advice. By shifting the compensation structure away from commissions on individual products to a quarterly fee based on the asset value of a clients cumulative account, advisors are able to dedicate more time to face-to-face counseling their most lucrative clients. Fee-based advisors are actually paid for the advice they give rather than the products they sell.

The idea of a fee-based practice began in the early 1990s and has grown tremendously, especially among high-net-worth clients. Assets under management in fee-based relationships have grown more than tenfold over the past 10 years.

This popularity is due, in large part, to the fact that a fee-based practice offers genuine benefits to both the advisor and his or her clients. Most important is that charging a quarterly asset fee means the advisor will get paid more when the clients account performs well and not as much when the account doesnt do as well. As a result, the interests of the client and the advisor are more closely aligned, and conflicts of interest are eliminated.

Another advantage of a fee-based practice is that it generates a consistent and predictable revenue stream. Consequently, it is much easier to determine the value of the business should the advisor ever decide to sell the practice. Furthermore, a systemized revenue stream could substantially increase the value of the practice.

The process starts with the advisor analyzing his or her book of business. The best candidates to switch to a fee-based relationship are high-net-worth clients who have been with the advisor for more than five years. These are the clients most in need of the professional consulting the advisor offers.

Meet with five to 10 of these prime candidates to explain the change and how this new kind of relationship would benefit them. Most advisors should plan to transition their book of business to a fee-based practice over a one- to three-year period.

Advisors can certainly make the transition themselves. There are a number of books and software programs that are now available that offer how-to assistance. But its a big job. A sensible alternative is to look to a top-quality broker-dealer for assistance. The broker-dealer can provide guidance to ensure a smooth transition process.

A broker-dealer can provide a mentor who may be available to give step-by-step assistance in evaluating the advisors client base and selecting the best candidates to move to fee-based relationships. The mentor can also identify all of the required registrations and disclosures and provide guidance in establishing a sound fee structure, positioning the advisor as a problem-solver rather than an order-taker.

A broker-dealer can also provide tremendous ongoing support, such as education and training, monitoring and managing assets, online access to client account information, online trading, and the required client account reporting.

In most cases, an advisor must supply all clients in a fee-based relationship with a quarterly recap of their account activity and balances. These quarterly reports are a valuable benefit for the client, but producing them can be a complicated and time-consuming task. Most broker-dealers are able to produce and mail reports that are far more comprehensive–and probably more accurate–than the advisor could produce alone.

The broker-dealer may also provide the latest technology and software, such as asset allocation, trade blasting and client contact management, to help manage the advisors clients and his business.

Advising clients will require a much broader and more advanced understanding of the business, the clients, the marketplace and the multitude of increasingly complex products that the advisor can draw on to help clients achieve their financial goals. The broker-dealer can make available a number of continuing education and training opportunities that cover technology, product knowledge, and identifying and understanding clients needs. It may also have a wide range of financial products and services that would help clients meet those needs as their life situation changes.

Most broker-dealers usually charge an administrative fee for this package of services and support based on the clients account size. The fee can range from 0.05% to 0.40% of the client fee, much more cost-effective than an individual rep can do on his or her own.

Research shows that the number one reason clients change financial advisors is the lack of ongoing communication–communication and customer service are even more important than investment performance and cost. This is especially true in todays turbulent economic and market environment where investors have found themselves confused and overwhelmed. As a result, a strategy like fee-based relationships that encourages objective, professional counseling has become more popular.

Advisors who dont offer their clients the opportunity to switch to a fee-based relationship could quickly discover that someone else already has.

Carolyn A. Jergens, CFP, CIMC, CLU, ChFC, is senior vice president, advisory services for ING Advisors Network, Torrance, Calif. She can be reached at JergensC@INGAdvisors.com.


Reproduced from National Underwriter Edition, April 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.