Great things rarely occur within your comfort zone. Earning your revenue as a financial advisor via commission-based products like mutual funds or annuities might be straightforward and familiar, but it isn’t a sustainable way to grow your practice.
It’s not like this is a great secret, either; there’s been a steady trend in the industry towards evolving to fee-based practices and the provision of wealth management services. But just because this trend is widespread doesn’t mean that transitioning to fee-based models comes without any challenges. Let’s break down the why and how of transitioning away from selling commissionable financial products to providing fee-based wealth management services.
As a commissions-based advisor, your practice might depend on selling annuities, stock trades in a commissionable account, or a handful of other discrete product sales. Regardless of what products your business currently sells, transitioning to a fee-based advisory practice means you’ll be expanding the services that you offer.
As a result, your one-time customers will become long-term clients. Rather than provide them with one-off investment products, you’ll instead provide them with a wide range of wealth management services over the long term. You’ll also have a fiduciary responsibility to that client. They’ll gain peace of mind knowing that your success as their financial advisor depends upon the success of their portfolio; not on your ability to sell an annuity or mutual fund.
This is an enormous benefit for the client. Knowing that their advisor is sitting on the same side of the table is reassuring and helps justify their decision to put more of their assets under your management. After all, it isn’t just their assets they’re trusting you with, but the future that those assets enable.
As a fee-based advisor, you’ll finally be able to step off of the treadmill, so to speak. Your revenue won’t depend on constantly finding new customers to sell your product to. Instead, you can focus on providing wealth management services that retain clients.
The business value of serving clients rather than selling to customers can’t be understated—once you begin providing fee-based financial advice, more of your marketing efforts go towards growing your business rather than maintaining it. As a commissions-based advisor, your survival depends upon acquiring new business. You’ll need new business as a fee-based advisor, of course, but the fees you earn as a percentage of assets under management (AUM) serves as something of a safety net.
With the greater reliability of fee-based revenue models, you’ll also be better able to plan and strategize for the future. You can time expansion initiatives or buckle down and cut costs before things get tough.
One downside to fee-based revenue models is how they’re tied to asset performance. When the market is down, your revenue will contract correspondingly. It’s important to note that the same is true for commissions-based advising—if the market is down, fewer people will purchase annuities, mutual funds, or other commissionable products. Furthermore, the long-term trend of the market is towards growth. Unless you begin providing fee-based services at the start of a serious recession or depression, your business valuation will likely grow in the long-term.
Over time, earning a fee as a percentage of AUM leads to greater and more consistent revenue than is possible on a commission basis, but that isn’t the case at first. But that's why we aren’t describing the transition from a commissions-based to a fee-only revenue model in this article—we’re talking about the transition to a fee-based revenue model.
To mitigate the initial dip in earnings, it’s best to assess your current client base and any new prospects. Are they suitable for the kind of long-term attention involved in wealth management services and should therefore be charged a fee? Or are they looking for a short-term solution and should therefore purchase one of your commissionable products? As your practice grows, it may make sense to reduce or cut your commission-based revenue entirely, but doing so right out of the gate will have a negative impact on your cash flow.
Having a communication plan will help you better manage your clients and triage them to your different product and service offerings when transitioning to a fee-based practice.
As stated previously, it’s important to evaluate whether a given client only has short-term needs, or whether they have a longer horizon and may be suitable for financial planning services. Have a conversation with them about this—you’re not a mind reader, and a client that initially only wanted, say, a one-time investment into a mutual fund may have other goals that they haven’t discussed with you.
Whenever you have this conversation with an existing client, make sure they understand the potential benefits described above, how your fee structure will work, whether you’ll tier your services based on the total assets they put under your management, and any other information that may help them understand what you’ll be doing and how you’ll be compensated.
It may come as a surprise, but some clients don’t even know whether their advisor charges a commission or a fee for the services and products they purchase. Being clear about this reduces the chances your clients become dissatisfied and raises the chances that they’ll stick with you in the long term.
In order to justify your fee, you’ll need to take on new responsibilities and provide new services to your clientele. At minimum, this will mean managing their investment portfolio on a continuing basis, but it should also include financial planning services and pursuing the relevant licenses to do so.
Taking on all of these new responsibilities and learning the skills necessary to provide wealth management services is an intimidating prospect, but if you’re transitioning to a fee-based practice at a sustainable pace, it should make the process easier.
Crucially, you don’t have to do this alone. Many aspects of financial planning—especially those that don’t require a personal, human touch, like investment management—can be outsourced to turnkey asset management platforms who can provide the technology and consultative support to fill in your knowledge gaps as you grow.
Since this is a big decision, we commissioned a study on the impact of outsourcing asset management. For commission-based advisors looking to transition to a fee-based practice, the results were promising:
If you’re curious about the other results the study uncovered, you can review a copy of the Power of Outsourcing Investment Management here.
We hope it helps shed light on the best path forward when considering how to become a fee-based financial advisor.
AssetMark is a leading provider of extensive wealth management and technology solutions that help financial advisors meet the ever-changing needs of their clients and businesses.
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