Back in 2002, Bryan Beatty was earning commissions on insurance products totaling about $500,000 annually. Since then, his yearly pay has quadrupled to $2 million-plus. Over roughly the same time frame, Lorraine Johnson has enjoyed a three-fold increase in her top-line revenue and a doubling of net income.
What accounts for these substantial gains? In a word: Fees.
In the early 2000s, the two financial planners–Beatty, a principal at Egan, Berger & Weiner in Vienna, Va., and Johnson, a principal at Triangle Financial Advisors in Raleigh, N.C.–transitioned their practices from commission-only to fee-based. And they haven't looked back since.
Their experience parallels that of countless other insurance professionals who have made the conversion successfully–and profited as a result. Chief reason: Fee-based advisors can generate a recurring revenue from their existing clientele while paring back (if not entirely eliminating) time-consuming and costly efforts on new client acquisition. By establishing minimum account deposits for assets to be managed, advisors can also focus their practices on building long-term relationships with their most profitable clients.
"Commission-based producers can make money in one of two ways: They can either see more people or make more money on each person they see," says Michael Kitces, a director of financial planning at Pinnacle Advisory Group, Columbia, Md. "Stage one ends when they reach a plateau and can't see more people because they're calendar is already full. The only way to grow is to move to stage two: Making more money off the people they've sold to and moving up-market."
Those producers now making the transition are in good company. According to Tiburon Strategic Advisors, the number of registered investment advisory firms–which charge fees for assets under management–totaled 19,500 last year. Given an average of 1.7 partners per firm, that equates to more than 33,000 RIAs nationwide. Tiburon projects that assets under management, which totaled $2.1 trillion last year, will increase by 18% per annum.
A fee-based practice, however great the income potential, is not for everyone, sources caution. They note that, given the additional staffing needs to properly service one's clientele–many of those interviewed needed to hire an administrative assistant, marketing rep and one or more paraplanners–the transition can severely test one's management skills.
Also to consider are technology and other investments. Particularly if the aim is to shed less profitable clients in order to cater to higher net worth individuals with complex retirement, estate and/or business planning needs, then more sophisticated planning software may be required as well as partnerships with CPAs and attorneys who are experienced in providing advanced tax and legal counsel to the affluent.
Still other questions must be addressed: What will the guiding money management philosophy be? Will the client-servicing platform be managed in-house or by a third-party? How will fees be assessed? Over what time will the transition be executed? And how might relationships with existing broker-dealers be impacted?
"To do the transition well requires much advance planning," says Kitces. "I see a lot of advisors who dive into this too quickly without carefully considering what they're getting into. Many grossly underestimate the time it takes to get sufficient assets to provide a revenue-base they can live on."
Indeed, advisors making the transition face the prospect of a potentially dramatic drop in income. Observing that the transition can be "exceedingly difficult," a joint study issued this year by LIMRA International and Moss-Adams observes that advisors can expect profitability to suffer from "one to three years."
That projection matches the experience of Beatty, who says his revenue declined immediately by 75% when he went fee-based, and that converting his existing book of business took nearly 3 years. Because of the potentially disruptive effect on cash flow, he suggests that advisors consider a gradual phase-in of the new compensation structure by, for example, converting every fourth client to fee-based in the first year, every third client in the second year, and so on.
That assumes, of course, those clients are willing to be converted. Sources note that while long-term clients tend to make the adjustment amicably, new clients are more prone to balk or question why compensation arrangements are being changed.
