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Practice Management > Compensation and Fees

Four Steps To Switch To Fees

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When it comes to transitioning to fees, the question isnt why, but how? Most advisors understand the advantages derived from a business model that includes both fees and commissions.

Clients benefit from a wider selection of investments, a generally more attentive and objective advisor, and better reporting. Many advisors prefer the consultative approach to advising clients as opposed to sales and also enjoy a more predictable, and in many cases, larger income.

So why is it that most advisors are still generating a majority of their revenues from commissions?

Part of the answer may be that they are still hesitant to make the move to fees for fear of losing income or losing clients. But, some may simply not know where to start. Keep in mind the following four steps as you consider making the transition to fees.

1. Keep it simple. One of the main reasons advisors move to fees is to simplify their lives by cutting down on busy work. Dont defeat the purpose by choosing an asset management program that is complex and difficult to master. Todays technologies and wrap products can help provide sophisticated money management and reporting–without a steep learning curve.

Some programs limit the number of mutual funds from which to build a portfolio, while others choose from thousands of both load and no-load funds. Selecting a program with the flexibility to construct portfolios from more funds should appeal to more clients.

Most fee-based wrap programs today offer full support, including a questionnaire for data gathering, asset allocation recommendations, investment recommendations, and reporting. But not all offer the advanced technology to produce these easily from your desktop. Web-based wrap products can offer instant access to customized client presentations, quarterly performance reports, daily portfolio updates and performance vs. benchmarks. This enables a high level of service to clients without costly software or data downloads.

Choose a program that creates portfolios from a broad selection of investments, has an easily explained methodology and selection process, is economical, and can be completely understood in a couple of hours. Complexity is not always synonymous with quality. A simple program can have you up and running faster and more efficiently.

2. Partner, partner, partner. Help comes in many forms. More employees–and overhead–are not the only answer. There are many allegiances that can help you efficiently and easily move into the fee-based management market.

One important decision you will need to make is whether to affiliate with your broker/dealers corporate Registered Investment Advisory firm (RIA) or establish your own independent firm.

Think of it as if you were just starting in the financial services business and deciding whether to join a broker/dealer or start your own. A broker/dealer is more complex than an investment advisory firm, but there are many parallels.

Although you will have to pay a portion of your advisory fees to the firm, affiliating with your broker/dealers corporate RIA could save you countless hours of administrative work, compliance headaches and annual fees.

A broker/dealers RIA includes all of its investment advisor representatives as one firm, allowing economies of scale to provide a range of competitive, cost-effective programs, while handling administrative details such as annual SEC filings, record keeping and audit liability. A broker/dealer-sponsored RIA is likely to easily meet the minimum $25 million asset requirement for registration with the SEC.

One important advantage to joining a SEC firm over a state-registered RIA is the ability to conduct fee-based business in any state without the need for additional registration filings and fees. This means that you will not need to meet the registration requirements for each state in which you conduct business.

A broker/dealers corporate RIA is responsible for all the legal and administrative requirements of the SEC, leaving advisors time to focus on advising and servicing clients.

Your broker/dealer is responsible for maintaining an updated Form ADV, providing client contracts and supervisory guidelines, and maintaining client files and other SEC requirements. Any audits would be conducted at its offices–not yours. Annual fees, which can be in the thousands of dollars, are the responsibility of the broker/dealer. As investment advisor representatives, investment professionals gain all of the capabilities of an investment advisor, without the burdensome costs and administrative requirements of maintaining an independent firm.

Another partnering strategy that can ease the transition to fees significantly is teaming up with an experienced colleague. Taking a “specialist” to client meetings can provide invaluable on-the-job training and help prevent beginner miscues. Splitting fees initially can help get you off to a fast and successful start, while building your knowledge and confidence. This transition does not require you to meet every need of every client yourself–nor does it mean more overhead.

3. Advise, dont sell. It has been said that load funds are sold and load-waived or no-load funds are advised. Fee advisors are client counselors and not salespeople.

One successful advisor transitioned more than $25 million by offering clients the choice of continuing to do business on a commission basis or move to a fee-based structure. He explained that the up-front commission structure limited his ability to change fund families because of the loads and did not allow comprehensive performance reporting. On the other hand, moving to a fee-based structure provided access to thousands of funds without transaction costs and comprehensive performance reporting. Most of his clients chose to move to the managed account program.

Another advisor who has been very successful in transitioning to fees believes his clients are better served in todays complex and volatile markets through a program that, in addition to the advisor, has an investment committee monitoring portfolios on a full-time basis. Regardless of what method you use with clients, you will need to position yourself as a professional consultant–not a salesperson.

4. Stay the course. It sounds like the investment advice you give clients, but it is also crucial to a successful adjustment to a new way of doing business. Dont let the “crisis of the day” distract you from your goal. To help you stay the course, put a list of the benefits of fee-based compensation in your personal digital assistant, day planner or computer and read it every morning. The list might include such benefits as predictable income, more confidence in the quality of your services, higher-end clients and a better quality of life.

Changing the approach to your business does require effort and persistence, but gradually adding fee-based money management to a practice is not as difficult as you might think. The right alliances, a simple program and a slight adjustment to your presentation process can bring you surprisingly positive results.

Kenneth R. Ehinger, FLMI, CMA, is president & CE O of Equity Services Inc., Montpelier, Vt. He can be reached at [email protected].

Reproduced from National Underwriter Edition, May 19, 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.