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The Next Step

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When considering a transition from commissions to fees, the first question for planners is usually something along the lines of “How much money am I going to lose?” Quite a few advisors who’ve made the switch have experienced a dramatic drop in income, but they say the short-term sacrifice is worth it.

While industry observers concede that transitioning from commissions to fees is no easy feat, they argue there is a right way–and a wrong way–to do it. Clara Sierra, senior VP and director of advisor services at AIG Advisor Group, says advisors who’ve had to live on bread and water while transitioning their firms failed to do their homework before taking the plunge. Many advisors “feel they have to go 100% fees right away–that they’re going to [have to] rip the Band-Aid off and let their practice bleed to death,” Sierra says. “That is not the way to do this transition.”

Mark Schoenbeck, VP and manager of advisory services at Mutual Services Corp., agrees. “Those people who are broke when transitioning did not do a good job of planning.” Granted, an advisor who is shifting from commissions to a fee-based business, in which he’s charging both commissions and fees, will feel less of an economic pinch. But Schoenbeck says that even a transition to a fee-only model shouldn’t cause a dramatic hit to an advisor’s wallet.

The bottom line: Do your research. Then, once the decision is made to transfer, the advisor must mentally prepare himself and his staff. It’s a “paradigm shift,” Sierra says. Indeed, says David Patchen, VP of Raymond James Financial Services in St. Petersburg, Florida, most advisors face a “psychological barrier” when confronted with the reality that a fee-based service model will require them to be a consultant, not just a money manager. That’s why advisors need to have a support team in their office to help them overcome moving from managing money to being a consultant, Patchen says.

Advisors should also adhere to a particular formula to ensure a smooth transition not only for their practice, but for their clients as well. Sierra says advisors should bring on new clients under a fee-based compensation model, and then gradually transition existing clients to fees. Advisors “must be able to straddle both avenues,” she says.

Schoenbeck of Mutual Service says most B/Ds counsel advisors to transition their top clients first, then work their way down. But he tells advisors to segment their clientele into three tiers–the top 25%, the middle 50%, and then the bottom 25%. Advisors should start transitioning the top-tier clients within the middle segment, or as Schoenbeck calls them, the “B+/A- clients.” As advisors begin the transition, “they should continue to do business the way they always have,” he says, because “that will help put food on the table.” If an advisor tries to sell the fee-based compensation model to his top-tier clients first, and isn’t confident in himself or in the process, “that’s going to blow up on him,” Schoenbeck says. “After four or five meetings, the advisor will realize that clients love the idea and the [advisor] won’t be grilled on the fees,” he says. “By the time [the advisor] gets to his top clients, he will have enough recurring revenue from that B+/A- group.”

Patchen of Raymond James says the biggest fear commission-based advisors have is that their clients “will push back” if charged a fee. He suggests developing a comprehensive list of the services the advisor has been delivering on an ongoing basis for free, like newsletters, phone calls, client advocacy building, meetings, updates of financial plans, and so forth. “Put it in writing for clients,” he says. Advisors should say that the firm is “going to move you into a fee-based structure, but understand we’ve always provided these services, and will continue to do so,” Patchen says. Clients measure their advisor by service and advice, he says. If clients see value in their relationships with their advisors, the advisors “will be able to successfully migrate their clients,” he says. “If not, [the advisor] is in a commoditized role.”

An Advisor’s Tale

Patrick Collins, president of J.P. Collins & Associates Inc. in Towson, Maryland, left his post as a commission-based advisor at Merrill Lynch last year to start his own fee-only firm. The majority of his Merrill clients were receptive to the idea of converting from commissions to fees. The ones who weren’t, he says, “didn’t really value the advice I was giving them.” He says he always follows the same process when converting clients. First, he schedules a meeting with the client to talk about the transition. Then he develops a proposal to “discuss where they currently are as opposed to where I would like to see them in a fee-based arrangement.” The next step is to review the proposal and talk about the pros and cons of fees versus commissions. He makes sure to tell clients that advisors who charge fees tend to be more objective than those charging commissions. He also discusses what types of fees will be levied as well as the investment strategy.

Like other advisors, Collins believes that charging fees instead of commissions aligns more closely with his personal values. “Merrill’s direction was different than the way I wanted to work with clients. The larger brokerage firms encourage advisors to get more clients and create lots of transactions because that maximizes revenues.” A fee-based service model allows Collins to have a more hands-on relationship with fewer clients. Plus, levying a fee gives him more flexibility. “Before, it didn’t make a lot of sense to take on a client with $50,000–it wasn’t cost effective,” he says. “Now when a client comes to me, I have the option of doing a financial plan for an hourly fee.”

More and more commission-based advisors are moving to fees. The good news is that there are a number of resources available to help with the switch. Schoenbeck of Mutual Service says nearly 65% of the B/D’s advisors are now licensed to offer fee-based services, and more than half of them are charging fees. Four years ago, he says, only 20% were licensed to levy fees. Over the last three years, AIG’s Sierra has also noticed an “uptick” in requests from advisors who want to convert.

To help, AIG “brings reps together to discuss the transition,” Sierra says, and recently launched a workshop called “Sales to Solutions: A Fee Transition Process.” From now until April 2006, with help from Mark Tibergien of Moss Adams (and an Investment Advisor columnist), AIG will hold a monthly workshop to train advisors on the mechanics of the transition, Sierra says. Moss Adams has the know-how to explain what an advisor’s balance sheet will look like, and how long the transition will take, Sierra says.

Well-known planner Deena Katz, of Evensky & Katz in Coral Gables, Florida, will also be on hand to “bring the field perspective” on converting a practice, Sierra says. Katz converted to fees some 25 years ago. Sierra says AIG will stay with advisors until they’ve completed the conversion, and also monitor the advisors quarterly.

Moss Adams’s 2004 Financial Performance Study of Financial Advisory Practices, conducted for the FPA, found that the majority of fee-only firms exceed the revenue performance of commission-based advisors. Fee-only firms accounted “for most of the practices in our study that are doing more than $1 million in annual revenue,” Tibergien says.

Mutual Service Corp.’s System for Success, a 12-month coaching program comprising four two-day meetings designed to help advisors make the transition, also utilizes the smarts of Tibergien and Katz. Moreover, Schoenbeck says Mutual Service also provides one-on-one consulting to advisors and will “work with them on a monthly basis and host peer group calls” so they can get advice from advisors who’ve already converted their practices.

You may also want to check out the Alliance of Cambridge Advisors. It’s a non-profit with about 110 independent advisors. To become a member, advisors must rid themselves of their trails within a year, says Rebecca Preston, a planner with Preston Financial in Providence, Rhode Island, and an Alliance member. “We try to encourage people to talk to as many advisors as they can, especially those who were commission-based,” she says. Advisors must be fee-only, join NAPFA, and meet fiduciary rules.

If you’re a commission-based advisor who’s contemplating the move to fees, know that it’s a “big change in how you do business,” Sierra says. But take heart as well. It’s hard to find an advisor who regrets making the transition, and there is a plethora of resources to help you.

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Washington Bureau Chief Melanie Waddell can be reached at [email protected].


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