Top five mistakes in shifting to a fee-based model

Protect your business and revenue by avoiding these five common mistakes when making the change in your practice:

1. Thinking instead of writing
Most advisors have a general idea of the way they want to make the transition to a fee-based model, but no formal plan, says Lamontagne, who is also a certified financial planner and partner with Ryan Lamontagne Inc.

Create a formal written document outlining every aspect of the switch. For example, write down timelines for shifting clients, and how you plan to contact them.

2. Automatically starting with your “A” clients
Be careful about who you switch to the fee model first.

Many advisors want to start with their top clients, says Lloyd Williams, a Lunenburg, N.S.-based executive coach with lloydwilliamsinc.com. It may take time for these clients to feel comfortable with the transition process, so it might be best to start with clients with lower assets.

Williams suggests segmenting your client households by assets as follows: top 20%; middle 60%; and lower 20%. The bottom 20% of your clientele may not have enough assets to make a fee-based model worthwhile. So, start talking to clients in the lower end of the middle 60%.

Once you have worked through your presentation several times and feel comfortable with the process, go to your top clients to begin helping them through the transition.

Alternatively, Lamontagne suggest, start with your target clients — not necessarily your “A” clients. If you’ve designed your practice around them, then they are the best source for suggestions on pricing and services.

3. Choosing the wrong account
Particularly if you are an independent advisor, finding the right custodian can be a challenge, says Lamontagne. Some platforms do not properly code fees, so your clients will see their rate of return before fees rather than after fees.

Try several fee accounts to find what works best, says Lamontagne. Transfer a small, trusted group of clients or even your personal accounts to see how the platform works before making the switch for your book.

“It’s difficult to think of every question to ask ahead of time if you’ve never done this,” he says. “But once you have actual clients or yourself on the platform, then you get a much better understanding [of what to ask].”

4. Switching too fast
Many advisors try to convert their clients to a fee-based model all at once, Williams says. That is a mistake because switching to fees often means an initial drop in revenue.

To maintain your revenue, make a schedule to work on a commission and a fee-based model at the same time, he says. For example work on your commission model in the morning and fee-based clients in the afternoon.

5. Leaving compliance out of the loop
Switching to a fee-based model before talking to your compliance department can lead to many headaches.

“There is a myth that the regulators want advisors to all be on fees,” says Lamontagne. “But when you look at the structure of the industry, it’s really set up for the commissioned advisor.”

Regulators often believe you are trying to charge clients twice when operating under a fee model, he says.

To avoid confusion, talk with your compliance department about your plans to switch to a fee-based model. Ask about any issues with your plans or if there are better methods to follow.

Compliance departments aren’t always forthcoming with answers and advice, he says, so don’t be afraid to prod them for answers.

IE