Switching the compensation structure of your practice to a fee-based model from a commission-based model can be a lengthy and challenging process. Whether you are switching to a fee for service or an asset-based fee, experts recommend planning for the switch well in advance.
The transition will be smoother if you’re prepared for the obstacles that you’re likely to face, says John De Goey, a certified financial planner and vice president with Hamilton, Ont.-based Burgeonvest Bick Securities Ltd., where he operates under a fee-based model.
“If you know going in that you have to go through this in order to get to a better place when you come out on the other side,” De Goey says, “the odds of being successful are much higher.”
Follow these steps to boost your chances of a successful transition:
> Establish your services and price
“In a fee basis, what you’re really doing is selling a service,” explains Marc Lamontagne, founder of To Fee or Not to Fee, an Ottawa-based advisor training company that offers workshops on the transition to the fee-based model. To begin the process, he suggests, ask yourself: “What is the service that I’m actually selling?”
Having a thorough understanding of your service offerings is critical to selling your value proposition to clients and to deciding what level of fees to charge. In setting your fees, begin by conducting a profitability analysis to determine how much you would have to charge in order to earn a profit.
Also take into account what your clients would consider reasonable, suggests Lamontagne, who is also a CFP and partner with Ottawa-based financial planning firm Ryan Lamontagne Inc. “Look at your ideal client, look at the level of service you’re going to provide and then overlay that with the fees,” he says.
You can get an idea of what is competitive by looking to colleagues and competitors offering similar services on a fee-based model.
“The reality is, you have to charge what the market will bear,” says Lamontagne.
> Brace for a drop in income
In the first few years of the transition process, advisors typically experience a decline in income. If you switch all of your clients to fees in one year, De Goey estimates, your income in that year could drop to one-third its previous level. It typically returns to its previous level within four years of charging fees and, in most cases, it subsequently rises above the level of income you were earning on commissions.
“There is a short-term pain for a long-term gain,” says De Goey. He suggests securing alternative financing for the transition process, in the form of either a cushion of savings or financial support from a working spouse or other family member.
To limit your disruption in income, consider spreading out the transition process over a number of years by moving clients to fees at a gradual pace.
> Create a transition plan
Determine how quickly you’d like to make the transition and create a schedule. For a fairly fast transition, consider shifting two clients per week to the fee-based model, Lamontagne suggests. But avoid rushing the process, he warns.
“You need enough time to be able to explain why you’re doing this,” Lamontagne says, “and you need enough time for the client to ask questions.”
An effective starting point is with new clients. Begin taking new clients only on a fee-basis, suggests Lamontagne. This allows you to refine the model and practice selling your value proposition to new clients before switching existing ones.
From there, start introducing fees to your ideal clients — those with whom you have strong relationships and those you design your services around — and then work your way through your client roster.
This is the second in a three-part series on switching to a fee-based model.
Tomorrow: Selling clients on your fee-based compensation model
IE