In the ever-evolving landscape of financial advisory services, the shift from a commission-based model to a fee-based structure has become increasingly prevalent. This transformation is driven by the desire for greater transparency, enhanced client-advisor alignment, and a focus on providing comprehensive financial solutions, while also maintaining a profitable service model that truly provides value for clients.
As you navigate this transition, one of the steps will be deciding which accounts to switch to fee-based and which are best to remain commission-based. Selecting the appropriate clients for each goes beyond mere profitability considerations and extends to factors such as client preferences, investment goals, and the nature of the advisor-client relationship. Identifying clients who are compatible with the fee-based structure and who stand to benefit the most from comprehensive advisory services can go a long way toward a successful transition and long-term client satisfaction.
In this article, we will delve into the task of identifying clients for a transition from a commission-based to a fee-based model. We will explore the factors that financial advisors need to consider, the client segments that are most suitable for the fee-based approach, and how to effectively communicate the transition to clients.
It’s important to identify those clients who will benefit from your new business model. Segmenting your clients according to specific criteria is the most efficient way to determine your next steps. The process of doing so can be streamlined with the proper plan.
Historically, financial advisors charge clients for services using one of three compensation models: commission, fees, or a combination of the two.
The technology, regulatory oversight, product availability, and client expectations of the financial services industry are evolving. With these changes, one pricing model has emerged as a preference for many leading financial advisors and their investors.
The fee-only model is gaining popularity because it addresses the conflict-of-interest concerns brought to the fore by industry regulators and creates greater transparency around fees for increasingly sophisticated investors who want to better understand the cost of the advice they are receiving. Additionally, financial advisors appreciate the opportunity to provide holistic wealth management services that the fee model allows them.
Transitioning to a fee-only or hybrid model (a combination of both fee and commission-based support) requires some effort. But, when you consider the challenges of remaining commission based and the long-term implications to the services you can afford to provide, as well as the impact on your business’s value, moving to fee may well be worth the time and steps required.
The commission-based model is transactional, meaning that the financial advisor’s compensation is tied to the purchase or sale of an investment. The advisor receives an upfront or backend (deferred) sales charge upon completion of the transaction by the client.
Why can this be considered problematic? It’s easy to run into potential conflicts of interest when you are directly benefitting from certain moves.
Since the advisor is paid per transaction, he or she may be subconsciously encouraged to buy and sell excessively or make investments selections that pay more or a new commission, which may not always be in the best interest of the client. Commission-based financial advisors are held to a suitability standard, meaning they must give investment advice for suitable assets. So, if two investments are both suitable, the advisor is within guidelines to recommend the more expensive one or the one with the bigger incentives for the advisor, versus what is truly in the best interest of the client.
This differs from the higher fiduciary standard that applies to fee advisors (where they must act in the client’s best interests). In the scenario above, the advisor operating using the fees model would be required to recommend the less expensive option or the option that best aligned with helping the client reach their financial goals.
How are fee advisors paid? There are a variety of ways to charge clients fees. An Advisor may offer a retainer with a monthly or annual fee, earn a percentage of assets under management, charge an hourly or project rate, charge a subscription fee, or set flat fees that align with specific services.
Establishing the fee at the beginning of the relationship creates transparency and removes any surprises for the client. Also, when financial advisors are paid as a percent of AUM, the interests of the advisor and client are more closely aligned: when the client does well, the advisor’s revenue increases.
Financial advisors who are not chasing the next transaction to maintain an income stream have the opportunity to develop stronger, more in-depth relationships with their clients. The fee advisor may have the ability to offer comprehensive financial planning services, which creates a deeper level of trust and understanding that is often not possible with a transactional relationship.
Another advantage for fee-only financial advisors? Fee businesses can be better valued in the marketplace (a major benefit when the advisor begins to consider retirement or succession). The recurring revenue associated with the fee model can be more stable, stickier, and often higher than what can be achieved in the commission model. Plus, stronger client relationships make the financial advisor more “referable.”
Some client groups benefit more from the fee model because of their needs for wealth management, financial planning, prompt service, or addressing a complex financial situation.
Typically, ideal clients for the fee model include affluent, high-net-worth (HNW) and ultra-high-net-worth (UHNW) clients and families, clients with long-term investment horizons, and clients seeking comprehensive financial planning and ongoing advice.
High-net-worth individuals and ultra-high-net-worth clients have unique financial needs that align well with fee-based services. These individuals typically possess substantial wealth and complex financial situations that require financial specializations and increased levels of attention. By transitioning HNWIs to a fee-based model, you can unlock significant growth potential for your clients and yourself.
In a fee-based structure, advisors can provide comprehensive wealth management services tailored to the specific goals and aspirations of HNWIs. This may include investment management, estate planning, tax optimization, risk management, and philanthropic strategies. The fee-based approach allows you to align your compensation with the value you provide, fostering a strong partnership built on trust and long-term collaboration.
For clients with extended investment horizons, such as those planning for retirement or wealth preservation over multiple generations, fee-based services can offer significant advantages. Unlike commission-based models that often incentivize short-term transactions and do not provide the financial means to be able to provide ongoing in-depth services to clients in a profitable manner, fee-based structures encourage a more strategic and holistic approach to wealth management.
By transitioning clients with long-term investment horizons to a fee-based model, you can focus on creating comprehensive financial plans, setting appropriate asset allocation strategies, and providing ongoing monitoring and adjustments. This long-term perspective aligns the advisor's interests with those of the client, ensuring a consistent and diligent approach to wealth management that is essential for achieving more sustainable financial goals.
Many clients today seek more than just transactional advice. They desire comprehensive financial planning services that encompass various aspects of their financial lives, including retirement planning, tax optimization, college funding, and more. Fee-based models are particularly well-suited for meeting the needs of these clients.
By transitioning clients seeking holistic financial planning to a fee-based structure, you can provide a more comprehensive suite of services beyond mere investment advice. This may include personalized financial plans, ongoing monitoring and adjustments, regular progress reviews, and proactive communication. The fee-based approach fosters a stronger advisory relationship built on trust, transparency, and the shared goal of achieving the client's broader financial objectives.
In addition to bolstering their ability to serve their clients, one of the reasons financial advisors gravitate toward the advisory model is its revenue growth potential.
It’s not simply a matter of numbers. For fee advisors, the percentage of recurring revenue is a key metric of success. This is why assessing how much support your clients need—and the type of support—is key to creating a business with long-term profitability.
Before embarking on the transition from a commission-based model to a fee-based structure, it is helpful for financial advisors to look at the profitability of their current commission-based model.
In looking at your commission business, your income was transactional and dependent upon the purchase or sale of a product. In an advisory model, income can be a percent of assets under management (AUM), an hourly rate, or a set fee for a specific deliverable (e.g., an independent second opinion, budget, college savings plan, or insurance assessment).
The key to segmentation is reviewing your existing client base to determine which clients are in the most need of the services you will be providing and which ones have sufficient assets (or will at some point in the future) to make your efforts worthwhile.
By evaluating the revenue generated by each client household and the associated costs incurred in servicing them, advisors can identify the right service model for each client.
Beyond profitability considerations, financial advisors must also assess the strength and depth of their client relationships. This involves evaluating factors such as client loyalty, satisfaction, and the overall quality of the advisory relationship.
During the assessment, financial advisors should identify clients who consistently generate revenue and have the potential for growth. These clients demonstrate a long-term commitment to their financial goals and are more likely to benefit from the added value and comprehensive services offered in a fee-based structure.
By identifying clients who have a strong rapport and a higher probability of retention, advisors can prioritize their efforts and allocate resources effectively during the transition process.
This client-centric approach ensures that the advisor can build on existing relationships and enhance the client's overall experience.
There are four common criteria when deciding which A or C share investment products to transition.
Some broker-dealers will not permit charging a fee if an upfront commission was charged within the last 24 months. If you recently charged a client an up-front commission on a product, you need to consult with your broker-dealer on timing the transition.
By evaluating the complexity of clients' financial situations, advisors can determine which clients are best suited for the fee-based model. Clients with intricate financial needs, such as complex investment portfolios, estate planning considerations, or tax optimization requirements, often benefit more and welcome the holistic approach and added value that fee-based services can provide.
Each client has unique expectations and aspirations when it comes to financial advisory services. Those with long-term wealth preservation as their main or secondary goal are keen on getting support for many years to come. This alignment enhances client satisfaction and fosters a long-term partnership built on shared objectives.
Clients who seek more than just transactional advice and value the integration of various aspects of their financial lives are well-suited for the fee-based model. They understand the importance of a comprehensive approach that encompasses investment management, retirement planning, tax strategies, and more. Identifying and prioritizing these clients during the transition process ensures that advisors can cater to their needs effectively and build lasting relationships based on trust and shared values.
Smaller clients may be looking for less support and might not need your services as often. These investors may not want to transition away from a commission-based relationship because they don’t have a need for holistic financial advice and only want occasional support with asset management.
Optionally, at this point, you may want to consider building out a new service model. Your new service model can allow you to accommodate a wide range of client account sizes and services. Ask for help from your AssetMark Business Consultant in setting your fee schedule and building out appropriate and profitable levels of services and communications for each tier of your new service model.
Another reason to segment your client base is to make sure you can tailor your practice to meet the financial goals and needs of your clients while remaining profitable. You must be able to either provide the services needed or provide access to those services, so they don’t have to look elsewhere for comprehensive financial support. One of the common reasons that investors leave their financial advisors is simply not getting the services they want and need.
Learn more: Why Investors Leave Their Financial Advisors and How to Improve Retention
However, you don’t have to offer every service yourself. You can supplement your services with third-party solutions to give your clients the holistic support they need.
COIs: You can use your Centers of Influence (COIs) (aka – Strategic Partners) to point people to the adjacent services they might need—like tax planning with a local CPA or real estate services from a luxury property realtor. Building your COI network can help bring in new clients as those professionals may also recommend your services to clients in need. For HNWI and UHNW you may want to provide a more concierge level of service where you facilitate or lead these interactions, versus handing clients off to handle matters with the third party themselves.
Outsourcing: You can also offer financial services through your firm that are not directly handled by your team. Outsourcing frees up your time so you can develop a more consultative relationship with clients and puts the expertise of specialists at your disposal. Choose high-quality solution providers that reflect the objectives and philosophy of your firm. You can outsource anything from investment management to marketing, compliance, IT, and administrative tasks; leveraging the resources of a solution provider can be the difference between satisfying your clients’ holistic needs and falling short.
With your expanded service offering, you may want to update your value proposition. Reevaluate your value proposition and explore whether or not it best communicates who you best serve, how you solve for their unique challenges with the services you offer, your philosophy, and what you hope your clients will get out of working with you.
One of the most important elements of your transition is keeping your clients apprised of what’s happening, why it’s happening, when it’s happening, and how it will impact them.
Your value proposition should be part of the language you regularly use to describe your offerings or talk about your practice with clients, so it should be included as you communicate the changes occurring as you transition to fees. Consider how the fee-only model enables you to better serve your client base, impacting the who, what, and why parts of your value proposition.
Crafting personalized messages for each client segment allows advisors to effectively convey the benefits of fee-based services. Tailoring the communication to address specific client needs, concerns, and aspirations enhances client engagement and understanding. By demonstrating how fee-based services can address their individual financial objectives, clients are more likely to embrace the transition.
You’ll need a multi-faceted approach that reflects the relationship you have with your clients and their preferred method of communication—for them and you. Start with a communication strategy, then build out the plan to support it. Here is some sample language that can be used in your client outreach efforts.
When you are ready, finalize and send your client communications per your communication plan.
When communicating the transition to clients, it is important to emphasize the benefits of the fee-based model. This includes highlighting the transparency, personalized advice, and comprehensive services that fee-based models offer. Clearly articulating how the new model aligns with clients' financial goals and provides added value helps build enthusiasm and acceptance among clients.
During the transition, it is important to anticipate and address potential client concerns and questions proactively. By providing clear and comprehensive information upfront, financial advisors can ease clients' anxieties and build confidence in the fee-based model.
Remember, the goal is to make clients as comfortable as possible with a scenario they most likely haven’t encountered before. Be prepared for their questions by creating an FAQ that addresses probable concerns to alleviate confusion before it even starts, answering questions like:
Also create a list of talking points so you and your team are able to handle any queries during client meetings. These highlights can help your team focus on the positive changes, like fiduciary duty and providing more agile services.
Being proactive in addressing concerns fosters trust and reinforces the advisor-client relationship during this transition period.
Ultimately, how well you identify and engage with the right clients for your new business model will determine your long-term success. Satisfied clients will typically choose to rely on you for years and often make a great source for referrals. It’s important to proactively assess and identify those clients who will benefit most from the advisory model and who will be a source of organic growth for your practice.
Collecting feedback from clients and advisors is important any time, especially times of change for continuous improvement. Soliciting input and insights from clients allows advisors to understand their experiences, address any concerns, and make necessary adjustments to enhance the fee-based offering. Regular feedback loops foster a client-centric approach and contribute to the long-term success of the fee-based model.
As captured in your transition plan, you’ll need to measure how your efforts are panning out. If capturing client feedback isn’t a part of your plan, you need to add it.
Check in with clients at the one- or three-month mark to get their thoughts. Don’t wait for their regular review meeting. Get in front of any issues you might not be aware of. It’s as simple as asking the question.
It’s more cost-effective to retain a client than to prospect for a new one—that’s why ensuring you are working with the best clients for your practice, and delivering the service and support they expect, is the foundation of a prosperous practice.
Transitioning to a fee business positions you to develop long-lasting, impactful relationships with clients and gives them financial confidence and the assurance they have an experienced financial advisor guiding them through sometimes challenging financial times. But a successful transition starts with a well-thought-out plan.
If you want help making the transition, we can help. AssetMark’s team is experienced in helping advisors like you transition to a fee-based model, scale sustainably, and help improve client retention. Reach out a schedule your consultation today.