The following is an excerpt from “Make the Leap: Smooth Transitions From Commissions to Fees,” a focus session on Monday during the Million Dollar Round Table’s annual meeting in Anaheim, Calif.
By Gregory B. Gagne
Our business model consists of three ways we are compensated, and how we use the methods depends on the circumstances of the case, the complexity or the size, and the ongoing service needs.
The first way is a straight consulting fee. The client pays us between $1,500 and up to $5,000 on a flat fee basis to research and then to create a plan. We are paid in two installments: 50 percent of the fee is due up front and then the second half is due upon completion and presentation of the plan.
The fee we charge is dependent on the complexity of the case or what we are being asked to do for the client. At this point the client is under no obligation to use me for any of the products that the plan may call for. We will let clients know that we can, if they so choose, implement any of the recommendations, such as life insurance or long-term care insurance, but they are under no obligation to do so. Our engagement is to tell them in an unbiased way what the issues are and how to solve them.
Some folks choose to take the plan and walk, and that is fine.
What is interesting is that most folks choose to have us implement the plan. They know that we will earn a commission should they want to use a financial product that we are suggesting, such as long-term-care insurance. They are pleased because we walked them through, via the planning, what the threats are to their situation, and we are not closing a product sale while teaching them. Once they understand the problem, they can in a less threatening way understand the product solution, and writing the case is easy.
The next method is commission-only. We do not use this method often. For someone who is simply looking for, say, $500,000 of term insurance or something like that, and they simply want the order filled, we will do this activity on a transaction basis.
The method that most folks select is our assets-under-management basis. This is where they pay a fee based on the value of the portfolio for as long as they remain clients. This method has served my clients well because they have ongoing supervision of their financial affairs from my office. My firm now employs a staff of four people who each have an area of accountability to serve our clients and to help me grow the business.
Fee structure varies
The actual fee structure may vary from advisor to advisor, but generally speaking, most assess the fee based on invested assets under management.
Most advisors apply some form of a tiered schedule based on those assets. For example, from $100,000 to $500,000, the client would pay 1.25 percent, and from $500,001 to $1 million the client would pay 1 percent. From $1 million to $2 million, the client would pay 0.75 percent, and above $2,000,000 the client would pay 0.5 percent.
Some advisors put the assets through these break points, and the client pays the lower fee on just the amount above the threshold. In my firm’s situation, we do not. If the client assets are above the threshold, then the entire amount of assets under management will be charged at the lower rate. We have found that this encourages clients to strive to get to the next break point.
Some advisory firms may charge a flat fee for planning and then an asset fee for the management. It really is up to the advisor to determine the best method for the situation. In our firm we charge the asset fee, and for that fee handle the management and the financial planning.
Our clients receive for their fee much of what many advisors have been taught to give away for free in the past in the hope of obtaining the sale. We give away at our expense the initial consultation, and that’s it!
If the prospect decides that he or she wants to become a client, then the prospect should be happy to pay for the research, the proposed planning recommendations as a result of the research, the implementation of the recommendations, and then the ongoing service of the planning.
Ongoing service helps, too
We designed an ongoing service platform that keeps us in front of our clients on a continuous basis over the course of the year, from newsletters and quarterly investment reports to review meetings and video updates. We know that if we do not add value as their advisor, they will go elsewhere.
The difference between the transaction and recurring revenue model is that once we convert a client, we are paid to keep that client. We do not necessarily need to go out and get a new client to generate a new commission to make our income.
This allows us the ability to spend more time working on the client relationship. As a result, our attrition rate is very low.
I know some folks might be thinking that it may be better to simply get paid 5 percent to 6 percent up front under the traditional model versus taking a smaller compensation of, say, 1 percent per year. I would suggest that that might be a bit shortsighted, because as I write these cases and the clients stay, we are building an annuity stream that resembles the musician model – that is, instead of being paid only when we execute the performance (the sale), we are paid every day the client remains a client and even when we are sleeping! The key takeaway is the ongoing income stream.
Gregory B. Gagne, ChFC, is the founder and managing member of Affinity Investment Group, LLC, an Exeter, N.H., firm specializing in wealth management and distribution planning services for retirees. A 12-year MDRT member with four Court of the Table and three Top of the Table qualifications, he is also a MDRT Foundation gold knight, a member of The Society of Financial Services, and a past president of New Hampshire’s chapter of the National Association of Insurance and Financial Advisors. The remarks above are excerpted from Gagne’s MDRT 2012 presentation,, “Make the Leap: Smooth Transitions from Commissions to Fees.”