A growing proportion of advisors are abandoning commissions and adopting fee-based compensation models, which can take the form of a fee for service or a percentage of the client’s assets. Before making the transition yourself, it’s important to consider how well the model would fit in with your market, your services, your firm and your income needs.

“Be confident in your abilities and in the rightness of your decision,” says John De Goey, a certified financial planner and vice president with Hamilton, Ont.-based Burgeonvest Bick Securities Ltd., who operates under a fee-based model. De Goey recommends thinking through the decision before beginning the transition process. If you’re uncertain, he warns, you won’t likely make a successful transition.

“If you have second thoughts, you’re probably better to wait a while longer,” he says.

In contemplating the switch, examine all aspects of your business:

> Consider your market
Fee-based financial planning is usually more appropriate — and more popular — among certain types of clients. When considering switching, look at your ideal client profile and determine whether it would make sense to serve that client on a fee-based model, suggests Marc Lamontagne, founder of To Fee or Not to Fee, an Ottawa-based advisor training company that offers workshops on making the transition to a fee model.

A recent survey of fee-based advisors conducted by To Fee or Not to Fee found that clients who tend to prefer paying fees over commissions include those with a higher level of investible assets, those with professional or management-level occupations, those who are self-employed, and those with a higher level of education, among other characteristics.

In contrast, the commission model is more appropriate for less sophisticated clients, those with lower asset levels or those who have less complex financial planning needs.

“Middle-class clients might be a little bit more fee-sensitive,” says Lamontagne, who is also a CFP and partner at Ottawa-based fee-for-service financial planning firm Ryan Lamontagne Inc.

> Assess your service offerings
If you have a sales-oriented practice, commissions might be the most appropriate form of compensation. But if you are engaged in comprehensive financial planning, chances are you could benefit from charging fees as you likely don’t receive commissions for many of the services you provide.

“If you want to free your time up to be able to spend more time working on client relationships and planning,” De Goey says, “then you would be a candidate to make the transition to fee-based.”

> Look at your firm
Is your firm supportive of the decision to switch to a fee-based model? Some firms lack the appropriate infrastructure to charge fees and may be unwilling to accommodate this type of model, according to Lamontagne.

“The industry isn’t set up for fees, whereas it’s very welcoming to commissions,” he says.

> Consider your income needs
If you’re seeking a more steady flow of income, the fee-based model can be a good option. Unlike the variable nature of commission-based compensation, fees generally lead to more predictable earnings.

“In a fee model, for the most part, your cash flow is almost like a salary,” says Lamontagne. “It comes in on a very regular basis.”

The model also provides you with more control over your compensation, because you can decide how much to charge for the services you provide. It enables you to view each individual client as a standalone business in terms of revenue and profitability.

Says Lamontagne: “Essentially, every client becomes a profitable relationship.”

This is the first in a three-part series on switching to a fee-based model. Tomorrow: strategies for making the shift.

IE