Note: I have put a “Portfolio Review Letters Kit” as well as other resources for you at www.billgood.com/managechange. If you have not yet converted to fees, you need this and other resources.

The Department of Labor is expected to soon issue rule changes to “address conflicts of interest in retirement advice.” The change is likely to be issued in the first quarter so that the regulations can be set in stone before a new administration takes office.

Who will likely be forced out of commission business into fees?

I put this question to Lou Harvey, chairman of Dalbar, arguably the very top market research firm in financial services. Lou has been heavily involved in following the DOL’s proposed changes to fiduciary under ERISA. He has also created training courses for people going through this transition. Visit his site at train.dalbar.com.

Here’s his reply (in italics):

Lou: Great question … but hard one to answer since everyone will have tradeoffs. Based on the DOL proposal, I see advisors that do IRA or ERISA business dividing into three groups:

  1. Fiduciaries… who charge fees and use their commissions to pay a portion of these fees. This means taking on the full fiduciary responsibility and being able to charge a fee that is commensurate with that role. Fiduciaries will have to demonstrate prudent decision making on their clients’ behalf.
  2. BICEs… (Best Interest Contract Exemption) who have contracts to act in clients’ best interest and disclose all compensation. These advisors keep their commission structure but are required to only present products/solutions that can be shown to be in the client’s best interest (may often be the lowest commission or no-commission). BICEs will have to demonstrate that they in fact, acted in their clients’ best interest.
  3. Salespeople… who reduce their services to eliminate all advice and recommendations and maintain commission business. This group can sell any product within FINRA regulations (suitability, fair pricing, etc.) but cannot give advice or make recommendations. The question is whether this drop in service will cause them to lose clients.

I followed with this question: Suppose an advisor has 300 clients. 20% of these are already in fee-based accounts. The other 80% of clients have paid a commission but nevertheless receive advice. Some advisors give advice on 401(k) and do not charge for it knowing they will roll it over when the client retires.

Lou: The 20% are already fiduciary relationships so the only significant change here is a BICE for any rollovers. For non-IRA and non-ERISA clients no change is necessary. Whether the 401(k) clients pay directly or through investment managers a BICE will be required for each. The recommendation to do a rollover will require a BICE. I think that most clients will end up requiring a BICE unless these clients are converted to fiduciary accounts with dollar-for-dollar fee for commission change.

Would the FA have to sign a BICE with each individual client?

Lou: Yes.

Would he have to go 100% or 100% commission?

Lou: Technically and legally it can be a mixed bag, but it might be impossible to get this straight. Imagine the advisor trying to work with a client on one basis for the IRA and a different mix of products for the non-IRA. Or figuring out if a client who calls is going to get the fiduciary treatment, the BICE treatment or the FINRA treatment! Seems impractical to me and most advisors will end up with one arrangement and serving all clients that way.

Oh, one other thing: one-on-one education is advice. A good sales presentation should always include educating clients and prospective clients so they can make intelligent decisions. That seems to mean you have to be a fiduciary to educate.

Become Fee-Based

If you are not yet close to 100% fee-based, get started.

The industry, with or without the kick from DOL, is going that direction. What follows is a strategy to get it done. Normally, it takes at least two years to convert to fees. Because you only have a year, be prepared to suffer some.

The Strategies

There are three strategies to convert to fees.

Cold Turkey: This involves a drastic change of business model. On a given day, you accept no more commission business. The income reduction plan is so severe few are able to survive it.

Top Down Blend: In this method, the FA starts with top clients and converts them first while accepting commission business from bottom clients. This also entails a severe income reduction plan, although not as severe as Cold Turkey.

Bottom Up Blend: This is a safer, realistic and practical way to wrap up the conversion to fees without joining the ranks of the destitute.

Mathematically, Bottom Up Blend is the only strategy I could find where you can convert to fees without an income reduction. But again, my calculations were for two years. You have one or less.

Your best income forecast with this strategy is: income is flat.

Know the Blend

The term “blend” means that during the transition, some portion of your business will still be commission until it is phased out.

To make a relatively painless transition, you will be conceptually breaking your business into two separate businesses. One will be growing, the other shrinking. Together their revenue is flat during conversion.

Your two businesses are:

  1. Fee based practice
  2. Commission business

Nearby is a picture of you following the strategy for one year. Income is level. The proportions of fees and commissions change.

The chart assumes you start with 20% fees. If you are already at 50% fees, the pain is less.

Phase 1: Get Organized

Since you are going to be running two businesses, you need to get better organized or work longer or, since you have less than a year pull this off, both.

Our strategy is:

  1. Build a Model Day that compresses the time you have been spending on non-sales functions.
  2. Get some help. If you have at least adequate service support, get some help with appointment setting and prospecting. If you do not have service covered, that is your biggest loss of selling time. Go borrow some money and get help. If you are a rookie and know you cannot survive on a fee-based business, get on a team.
  3. Re-establish communication with all clients, especially the bottom 25%. Send a letter every month.
  4. Get a list of your clients sorted by revenue from lowest to highest on revenue. I would put this in an Excel spreadsheet. Make this list your log. When a client sets an appointment, log it. Then log the results, “45K to XYZ Wrap Program.” Or, “Client does not want to pay fees. Recommended they transfer to self-directed brokerage account.”
  5. Figure out how many appointments you need to fill a week. Because you have not communicated very much with your smaller clients, they are not as responsive as your “A” clients. So plan on two appointments each.

    Let’s say your appointments are going to start Feb 2. You have 250 clients whose assets are not producing a significant amount of recurring revenue. There are a total of 232 working days until the end of the year. You are going to take off three weeks. That leaves you 217 days. I’m guessing it will take on average two appointments to convert each client. That’s 2.3 appointments per day.

    I would set a goal for three appointments a day. If you hit that, you are done around the end of September.

  6. Download the “Portfolio Review Letters Kit.” Submit it to compliance. The first letter will get most of your clients to call you. The second, confirms the appointment AND asks them to bring their statements.

Phase 2: Convert From Bottom Up

Once you get compliance approval on the letters in the “Portfolio Review Kit,” start mailing the letters to the client at the bottom of your book. I would probably start with 25 letters the first week. As people call in, schedule three appointments per day.

Keep your eye on your log. You have to decide whether to pursue or ignore for now.

In your review, propose a better plan. The confirmation letter in your “kit” asks your clients to bring in their other statements. Do your best to include outside assets in that plan.

In five words: do not sell fee-based accounts.

In my opinion, clients are not demanding it.

Firms and regulatory authorities are demanding it. And yes, financial advisors would love to have recurring income.

Fees are just a different form of compensation.

So don’t sell fees.

Bring in the client. Do a review. In conjunction with their other assets, propose a better strategy. At the very end explain the fees. DO NOT MAKE A BIG DEAL OUT OF IT.

As they start setting second appointments, set 1–2 first appointments per day to stay on your target for three — or whatever your number is.

Most likely, any client that does not go with your new model will require a BICE once the new regulations are in place.

Phase 3: Develop Prospecting

You will need to develop a prospecting system that can handle both transaction business and fee business.

Most likely, to keep income flat, you will need to bring in new assets that can generate some fees and commissions. Just converting existing assets will not likely give you the asset base to maintain income.

You will NEVER get enough assets if you rely ONLY on referrals. So you will need at least one channel other than referrals to bring in sufficient assets.

Your choices that can deliver new clients in the short term are: client/guest educational seminars; public seminars; cold calling; direct mail.

Phase 4: Complete Transition

The last step in the transition is to take your top clients over to fees. By this time, you should have built up enough fees to at least cover what it costs you and your business to survive financially. When you have this much in fees, it’s time to take the plunge and complete the conversion.

Whew. You made it.

— Check out Lou Harvey: Obama Just Blew Up Your Business Model; Here’s What to Do on ThinkAdvisor.