Is Moving To Fees The Boost Your Practice Needs?

“You have to re-acquire clients to some degree because you’re telling them to pay you differently,” says Beatty. “With new clients, it was a more difficult conversation to navigate.”

More often, however, it’s the advisor who has to decide whether the client will remain with the practice. And the reason comes down to basic economics. As the LIMRA/Moss-Adams survey observes, a typical insurance producer might require 800 clients over the course of a year to generate $280,000 in revenue, assuming the producers spends just 90 minutes per client and garners $350 in commission from each. By contrast, a fee-based advisor who spends on average 15 hours and garners $3,500 annually per client would need–and perhaps only have time for–80 clients to secure the same income.

The need to devote more quality time with the client is not just good business; advisors who fail to do so could be putting their practices at risk. Says George Gardner, president of Gardner Pension Services in Portland, Ore., “Registered investment advisors have a fiduciary responsibility to the client, just like any CPA or attorney. You’re giving advice for which you can get sued. So you better get lots of information and start thinking about the client’s interests first more than at any other time in your life.”

Joel Twedt, a chartered financial consultant and president of Twedt Financial Services, Lake Mills, Iowa, agrees, noting that as a fiduciary, the fee-based advisor is obligated to put the client’s best interests first and reasonably believe that recommended products meet the NASD’s “suitability standard.”

For producers contemplating the transition to a fee-based practice, the more immediate question is determining asset minimums. Beatty and Johnson say they require of all new clients $100,000-plus in investable assets, though Johnson adds most of her prospects fall within the $1 million to $5 million range.

How much do advisors charge in fees for their services? Sources say that rates typically range between 0.5% and 2% of assets under management, the percentage usually varying in inverse proportion to the account size. Given a $2.5 million account and 1% fee, that would equate to $25,000 annually.

To be sure, the broker-dealer will often get a cut of the advisor’s fee–sometimes as much as 40%. And many advisors are limited by their broker-dealer to how much they can charge for financial planning and investment management. Often, says Johnson, that’s because the broker-dealer wants to keep the advisor focused on the sale of insurance products, a priority that may be at cross-purposes with the advisor’s client-servicing strategy.

Production quotas needn’t, however, be a bad thing. And, in fact, most of the advisors interviewed by National Underwriter are “fee-based” rather than “fee-only.” They generate commissions on sales of insurance products, in addition to fees for financial planning and asset management services.

Gardner gets paid in any of four ways: for assets under management (1% on assets up to $1 million and 0.5% for amounts above that); between 2% and 4% for stock trades; $160 per hour fee for financial planning; plus a commission on the sale of insurance products. Beatty, too, earns a commission for sales to clients who don’t meet his $100,000 minimum for fee-based support.

A dual fee-commission structure, notes Johnson, is best for clients who prefer that the advisor be able to implement plan recommendations encompassing insurance products. The alternative is to turn the sale over to an agent who may or may not be up to the task.

But outsourcing insurance sales to an independent agent was just the right strategy for Dale Vetter. President of Vetter Associates, Willingboro Township, N.J., and chair of the Professional Interest Sections at the Society of Financial Service Professionals, Newtown Square, Pa., Vetter converted to a fee-only practice after determining that he would be better served jettisoning his former broker-dealer, which had demanded a 20% cut of his fees and had consumed a substantial part of his time on compliance work.

As part of the 3-month transition, Vetter dropped his insurance and security licenses, hired a law firm to handle compliance and regulatory tasks, revamped office procedures and purchased a new errors-and-omissions policy which, because he no longer enjoyed an E&O discount from his former broker-dealer, entailed an 80% to 100% increase in his premium. But Vetter insists the effort was worthwhile.

“The additional peace of mind, ease of operation and not having big brother looking over my shoulder have more than compensated for the additional costs of working independently,” says Vetter. “Plus, the expense increases are all tax-deductible.”