Practice management blogger John Anderson has been in the business since the early ’90s, when converting to a fee-based book of business was the hot trend, and yet advisors are still seeking his guidance on how to do this.
“I can’t believe that 20 years later I’m still having this conversation,” laments Anderson, an SEI Advisor Network managing director who writes a popular blog on practice management solutions.
But, citing data that the average advisor’s book of business remains stuck at just 31% fee-based, Anderson tells ThinkAdvisor in a phone interview that most advisors are doing fee-based business; it’s just that their books are divided between new clients who pay quarterly fees and older clients who remain commission-based.
For that reason, Anderson says advisors no longer need convincing that transitioning to fee-based business is worthwhile.
For one thing, fee-based business aligns advisor-client interests, whereas commissions raise suspicions that the products an advisor sells may not, objectively, be optimal for the client. And in a world in which regulators are increasingly scrutinizing advisor compensation, a fee-based model raises fewer red flags.
Advisors get the “why,” Anderson says. It’s the “how” they’re asking about.
“It’s how do we go back and take that old book of business and convert them to fee-based without sounding like, ‘I’ve been your advisor 12 years; I’m now going to charge you quadruple what I was.’ That’s the struggle,” he says.
The SEI exec, who writes weekly for the firm’s Practically Speaking blog, identifies three steps to make this case with legacy clients, the first of which is for the advisor to articulate his value.
“What is your value proposition that you want to offer; not just to new clients but to old clients? Your value proposition is foundational. It must be targeted to a specific set of clients you want to work with, the obstacles those clients are facing and the solutions you provide to those obstacles,” Anderson says.
“Most advisors are focused on too broad of an audience,” he continues. “If you understand who your target is, then you can understand what obstacles they face.”
Yet Anderson has observed that advisors often mistakenly segment their clients based on what’s important to the advisor (e.g., the client’s financial weight) rather than the client. Such an approach is an impediment to the advisor’s ability to demonstrate he can add value to clients’ lives and therefore charge that annual fee.
The next step, says Anderson, is “really understanding service you offer to clients. A really easy tool is what we call the client services statement. It’s a list of services broken down by category.”
So, for example, under the category of “investment oversight services,” an advisor can list “money manager selection process; using technology to aggregate the client’s entire portfolio on one site; portfolio rebalancing,” and many more things, depending on what that advisor offers.
Under the category of “retirement income distribution services,” an advisor can list “calculation of spending needs; tax-efficient distributions; Social Security review,” among other potential items.