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Practice Management > Compensation and Fees

To fee or not to fee

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The question of whether to charge fees for financial planning advice or take commissions for selling financial products cannot be answered in the space of a magazine story. Every advisor has to answer that question for himself, find his own comfort level and ultimately do what he deems best for himself and his clients. Many advisors are making the switch from commissions to fees. A few have made the transition and have subsequently changed back for reasons all their own. Here, four advisors who made the partial or complete transition to fees talk about the process.

Kevin O’Brien
Q: Why did you decide to add fee-based services?
A: There were a number of reasons, but the most important was the difficulty earning a living once a firm reaches critical mass. As a commissioned agent/rep, one works morning until night trying to generate the next commission. As you try to attract new clients, you build into your practice additional services or promises of service. If one offers services above and beyond the sale of a commissionable product, there is a time commitment. Eventually you hit your head against the ceiling due to the amount of service work required and the amount of time in a day … and the amount of time available to generate new commissions.

I reached a point where more and more time and resources were committed to clients providing no new income to the firm. It began to look like a reverse pyramid scheme. Rather than having a large number of people under me generating new income, I had a large number of clients above me sucking up all of my available time.

But I created this problem. I wanted to have a reason for my clients to want to work with me other than because of the product I was using to solve their problems. I wanted to be the reason they acted on an issue, not because the “car was fast, or the house was in the right neighborhood.” And, I was successful at doing just that. I needed a recurring stream of income … to be paid regularly by those who took advantage of the services offered.

Q: What kind of services lend themselves to a fee-based model?
A: Investment management and financial planning. We are paid on a recurring basis for the ongoing management of the invested assets and for our time and the years of experience and knowledge that go into the advice provided in plotting out a client’s financial future.

Q: How did you integrate them?
A: It took a while to convince myself of the fact that my earlier clients would have an interest in paying for that which they previously received free. However, once I gained the confidence in the new approach and the higher quality of services to be offered, I went full speed ahead. I introduced the third-party asset management program and committed to it 100 percent. The timing was good because I introduced this approach in mid-2002 as a solution to the ongoing problems caused by the decline in the markets. The solution was one whose time had come, and the fact it came with a recurring cost was not a problem to almost all of my investment clients.

Recognizing that my time was my primary commodity I committed to the fee-based financial planning process, as well. As an independent RIA, I am able to provide financial planning advice on a fee-oriented basis – charging fees for the services I previously gave away for free in the hopes of getting business. This was harder to do with existing clients, but every new client in the door now “hires” me before anything else is started.

Q: Did you make the complete switch?
A: The transition is not 100 percent. That is to say that there will always be commission-based services/products provided, but they are less than 17 percent of what we do now, after only four years.

Q: How do you keep fee-based and commission-based services separate?
A: They are separated by need. I fully disclose the fact that, while I am providing fee-based advice, I am also a registered representative of my broker/dealer and a properly licensed insurance agent for [certain] products, and that only those products for which I am appropriately licensed will be offered. That being said, my clients leave it up to me to decide which products make the most sense for them.

Q: What value have you realized from the fee-based services?
A: I now have a business with predictable, recurring cash flow. I have a life for the first time in my 30 years of being in this business. I can tell if I can afford to hire more help, take a vacation and pay for my kids’ college education rather than hope the next case gets approved or this new client agrees with my recommendations.

Q: How do you explain to clients and prospects the differences between the two?
A: My professional explanation would be translated in layman’s terms as, “You can pay me a lot now and hope you get what I am promising you, or you can pay me as we go, as you see the merits of my advice and services.”

Q: What has been the most difficult thing for them to understand?
A: How they ever thought they could do it all themselves. My clients realize they have better things to do than what I do for them. We coordinate their legal, investment, tax and insurance issues so they can spend their time on the golf course, with the grandchildren, traveling and living the retirement they always dreamed.

Kevin O’Brien is president of Creative Financial Strategies in Littleton, N.H.

Dean Zayed
Q: Why did you decide to add fee-based services?
A: For larger accounts, where the client is seeking a customized, managed portfolio utilizing a combination of investment vehicles, working on a fee basis makes the most sense for both the client and our firm. This provides an environment where we have the utmost flexibility in constructing the portfolio in an objective manner.

Q: What kind of services lend themselves to a fee-based model?
A: The kind of services that lend themselves to a fee-based model encompass highly customized, actively managed accounts that use different yet complementary vehicles, such as exchange-traded funds, unit investment trusts, mutual funds and institutional money managers. In addition, in a fee-based environment, we are able to advise clients on estate planning, tax planning and business planning.

Q: How did you integrate them?
A: We added a fee-based division to our existing financial services firm and tout it as a specialized set of services that requires us to act as a fiduciary (unlike commission-based clients). We then explain this to clients we feel are better off with a fee-based structure.

Q: Did you make the complete transition?
A: We did not make a complete switch, as we feel there are always clients who will be better off utilizing a commission model. The bottom line is that we have the flexibility to use both compensation models and will steer a client in one of those directions based on what we deem is most suitable.

Q: How do you keep the fee-based and commission-based services separate?
A: We explain to our clients our compensation methods and then make a recommendation based on what we think is best for them. Over time, we’ve been happy to build our fee-based clients with just those clients who will benefit from the services offered and then continue to recommend commissioned products for those clients who benefit from such products. Although separate compensation models, they are both promoted within the context of our financial planning firm.

Q: What value have you realized from the fee-based services?
A: The value is in being able to compete with larger companies (such as Merrill Lynch Northern Trust) who primarily use fee-based platforms to attract larger accounts. We can go head to head with those companies now and truly do an apples-to-apples comparison for our clients in terms of what services they will get for the respective fees being charged. We will get the client nine out of 10 times because our value proposition is more compelling as a boutique firm than the “big” players.

Q: How do you explain to clients and prospects the differences between the two? What has been the most difficult thing for them to understand?
A: I explain the differences in the licensure required to earn a commission versus charging a fee. I explain that we offer both and ultimately they (clients) can decide which model to choose. I will recommend one of the models based on the client’s situation and what is most suitable for them. A good example is making sure they understand breaking down all costs in a commission model vs. a fee model. Since most commission products bury the expenses inside the product and deduct them from gross returns, it is often difficult for a client to understand what they are really paying. I explain that with a fee, they will see the money leaving the account – but to not be alarmed, as this is a more transparent way of compensating us. We then take some sample commissionable products (such as mutual funds or variable annuities) and carve out all the internal expenses to fairly compare them with a fee-based model. Once they see this side-by-side comparison, they understand both models – and they always appreciate our straightforward, full-disclosure approach that no advisor has ever done for them before.

Dean Zayed is president of Prizm Financial Advisors in Wheaton, Ill.

Mark Little
Q: Why did you decide to transition to fee-based services?
A: I got weary of the yearly “starting over from scratch” on commissions grind. I remember that feeling that came every January: “Here I go starting all over again.” Starting over was fine when I made $75,000 or $80,000 per year, but I made sure I earned more every year, so the pressure to increase commissions when I got my production over $350,000 per year was brutal. It made life miserable.

Q: What kind of services lend themselves to a fee-based model?
A: Any service that offers recurring value: money management, financial planning, estate planning, tax planning. Any recurring wealth management services lend themselves to recurring fees.

Q: How did you integrate them at first?
A: I was basically a commission-based money manager, so I added nine additional regularly recurring “client deliverables” to my service offering and began charging quarterly fees for assets under management for this new wealth management offering – but only if clients fit my strict new ideal client profile I developed for those services.

Q: In the end, how did you complete the transition?
A: I implemented Bill Bachrach’s recommendation of politely disengaging from clients not fitting my new ideal client profile, only after I had replaced them with an ideal client paying my new fee. As a result, I never had a quarter where my production declined.

Q: What value have you realized from the fee-based services?
A: It took about three years to transition from commissions to fees, and my production actually grew from $380,000 per year in commissions to well over $1 million per year in predictable recurring fees. I did all this during the most obnoxious decline in the market I have experienced in my 19 years in the business. This proved to me that the value of having a trusted advisor offering comprehensive services far outweighed the discomfort clients felt about the huge market decline.

Q: How do you explain to clients and prospects the differences between the two?
A: I described the transition as moving from the old world to the new world. In the old world, my clients paid commissions, we met infrequently and I primarily managed their money. In the new world, I told clients that we would charge fees instead of commissions and that we would help them make smart choices about their money by meeting with them three times a year and implement 10 client deliverables for them, including money management, tax preparation, financial planning and more.

Mark Little is the founder and creator of The Freedom Experience Inc. in Chicago.

David J. Stone
Q: Why did you decide to transition to fee-based services?
A: I decided to make the transition to a fee-based model because I felt it was right for my clients and myself. I didn’t want to be perceived as, or feel like, a salesperson trying to convince people my product or service is better than any others. There is nothing wrong with being a commission-based advisor, just as long as you are looking out for the best interests of the client first and foremost.

Q: What kind of services lend themselves to a fee-based model?
A: The services that lend themselves to a fee-based model are either asset management or comprehensive financial planning.

Q: How did you integrate the fee-based model?
A: I introduced my fee-based model to my clients over a period of years. It started in 1999 when I was introduced to the concept of values-based financial planning by Bill Bachrach at a life insurance conference. At that point, I decided to make the transition from a commissioned-based practice to a fee-based model. Over the next two years, I introduced the concept of charging fees for my services to my clients.

In 2001, I charged my clients a flat fee and deducted any commissions I received from the fee, which is called the fee-offset method. The difference between my fee and the commissions I collected over a year’s time was the fee my client paid me. If the commissions were greater than my fee, then they wouldn’t have to write me a check. I did emphasize to my clients, I do not make change. In 2005, I made the final transition to a fee-only comprehensive financial planning practice. My fees are based on clients’ net worth, and their fees are paid to me on a monthly, quarterly, semi-annual or annual basis, either by check, through their investments or credit card payments. I left my broker/dealer and let my life insurance license lapse, so I can no longer “sell” any products, to which my clients have been very receptive.

Q: What value have you realized from your fee-based services?
A: The biggest value I’ve realized as a result of this transition is my relationship with my clients. I would say before the change they trusted me, but now they completely trust me since they realize I don’t have any hidden agenda and that I truly work for them. As I’ve asked prospects in the past, “How do you know when an advisor works for you?” It’s by the name on the check when the advisor is paid.

Q: What has been the most difficult thing for clients to understand?
A: The most difficult thing the clients needed to grasp from my conversion was how is this actually better for me (the client). When I explained the independence and lower cost to the client, coupled with the increased potential for growth with their investments, they had no problem coming to my new world.

David Stone, CFP, is an advisor with Personal Financial Advisors Inc. in Pickerington, Ohio.


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