The Keys To A Successful Transition To Fee-Based Advising

By Tony Gordon

As the popularity of fee-based and fee-only financial advice continues to rise, many advisors are making the switch – even in nations like the U.S., which don’t require fee-only practices.

This transition can go awry if not well-planned, and the changes that come with it go beyond just the payment structure.

Nations such as the U.K., which have moved closer to a fee-only financial services system, can be a source of guidance for advisors in countries with less specific regulations. With the right plan, advisors can navigate this change in a way that maximizes both business potential and client satisfaction.

Fees vs. Commission Charges

When advisors can mix fees and commissions, portfolio management is the easiest practice area to transition to a fee-based model. Advisors making this change open the door to more clients, greater amounts of business and higher incomes – one advisor I know increased his income twelvefold after switching portfolio management from commissions to fees.

This transition takes time, so prioritize your client list and implement in phases, starting with clients who have more assets first. Fees work best for clients who have built up enough assets to properly compensate advisors for their work.

These payments can and will accumulate over the years to surpass commission income. Clients who save or invest less money – often younger clientele – may struggle to afford the industry standard of fees.

One area in which a commission-based structure remains preferred is life insurance, both permanent and term. Not only do advisors make a substantial amount in commissions from these products, but clients may not be able to afford equivalent fees. Once again, this is especially true for younger clients.

Fee-Based Business

For advisors who transition their portfolio management business to fee-charging, explaining upfront costs is the next step. While commission payments are spread across transactions, allowing clients to pay smaller amounts more frequently, a one-to-two percent annual fee will hit clients more noticeably at once.

It can help to develop a basic business model to present to clients who want deeper explanations of their charges. Break out the high-level tasks that go toward maintaining a client’s portfolio and frame them as separate services.

Such tasks could include initial psychometric risk profiles, asset allocation, criteria-based fund selection, fund reviews and portfolio rebalancing. Client communication such as in-person meetings, videos or newsletters can also be included.

The value of all this time advisors invest in their clients adds up – by as much as three percent increase to their clients’ portfolios each year according to a Vanguard estimate.

Fee-Based Communication

Moving to a fee-based structure allows for far greater business scalability than most commission-based practices, as fees will allow more capacity for additional clients over time.

New clients can sometimes mean more demands on time, and as advisors add clients, they should only meet as needed. Let clients know that meetings can be very infrequent, even only once every few years.

In lieu of frequent sit-down meetings, consider sending regular client questionnaires via email annually which outline portfolio performance and confirm their preferred risk tolerance and asset allocation. Include age-based questions to be proactive about upcoming lifestyle changes.

Assume clients who don’t respond are satisfied. Beyond the annual questionnaire, check in with clients monthly so they know you’re there if needed. Even if they don’t respond, they like to know you remember them.

Fee-based advisors seeking new clients have a marketing advantage over commission-based counterparts. When advisors charge fees, they are usually required to meet higher regulatory and professional standards, which can be outlined in their promotional materials and contracts.

Many British advisors, myself included, moved away from commissions before the transition became mandatory – we could see commission model expiring. As that moment arrives in other countries, advisors should transition to fees sooner than later.

About The Author
Tony Gordon is a renowned financial services practitioner who built one of the U.K.’s most successful and profitable financial services businesses over his 40+ year career. He is a Past President and 43-year member of MDRT, and a Past President of the Personal Finance Society, a U.K.–based association for financial advisors. Tony also represented advisors for eight years on the Board of the Financial Conduct Authority, the British financial services regulator. He has spoken in over 50 countries, and wrote the best-selling It Can Only Get Better, Tony Gordon’s Route to Sales Success. Living in Bristol, England, Tony now focuses on speaking engagements and mentoring financial advisors. By joining and engaging with industry peers via associations like MDRT, you can keep your skills at the top of their game.