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.