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.

“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.”