“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effec-tive as possible.



> Shifting To A Fee-Based Model

Advisor: The experience of the past 18 months has finally persuaded me to convert my practice to fee-based from commissions. It will benefit my clients, as many will pay less than they do currently and, just as important, I will be able to provide the advice and service everyone requires without thinking, “What’s in it for me?”

I am concerned, however, about having the transition conversation with existing clients, some of whom, I know, will object.

Coach says: An increasing number of advisors have come to the same conclusion after spending large amounts of time counselling and servicing clients through the recent market gyrations. In many instances, these advisors have felt uneasy about charging commissions for reallocating assets in portfolios that had declined significantly. In other cases, clients who had decided to “go to the sidelines” by transferring funds to money market or fixed-income investments that paid considerably lower (or no) commissions still insisted on full — and often greater — levels of service.

In either situation, increased service requirements combined with reduced revenue do not add up to a profitable practice. The fee-based model allows you to meet client needs without regard for the investments chosen.

You are correct in making the observation that some clients will not immediately see the benefit, so you should be prepared to respond to their objections. Here are some sample responses to the most common questions:

Client concern: How much will this cost me?

Your response: I think you will discover the cost is very reasonable for the level of service I am committed to providing. The fee will be [X%, etc.], calculated on [your total invested assets, etc.]. If your portfolio goes down, so will my fee. Conversely, if your portfolio increases in value, my fee will reflect that change. We will review our arrangement on an [annual, etc.] basis. However, based on your current portfolio, the fee would be approximately $X for the next [year, etc.].

Client concern: Why should I change? I like the current arrangement we have.

Your response: I am changing my practice because it will enable me to focus more on the advice I provide; I will no longer be charging commissions. In the past, you have paid as much as $X in commissions for buying and selling securities, funds, etc. So, you can see how the fee arrangement can work to your advantage.

Also, under the new arrangement, you will be receiving all investment services required at no additional cost.

Client concern: If I already paid a commission five years ago, why should I have to pay a fee now?

Your response: It is very important to me that I maintain the level of investment service that you deserve. To do that requires continued research. Your fee will allow me to conduct the quality research necessary to stay on top of this volatile market and monitor your portfolio.

Client concern: How does your fee compare to that of other advisors?

Your response: A large number of advisors have this arrangement with their clients, so I have surveyed the market to make sure my fees are competitive. Other firms charge their clients as much as Y%. My fee of X% is well below that — and I commit to controlling expenses without sacrificing the quality of my work.

Client concern: Do I have to pay commissions, for example, on mutual funds in addition to your fee?

Your response: No. Most mutual funds can be purchased on what is referred to as a “zero front-end load” basis, which means there are no commissions included. All of your investment goes to work immediately.

Client concern: Can I take the fee as a tax deduction?

Your concern: Yes. You will be eligible to deduct the fee each year, which is better for you. Brokerage fees or commissions for buying or selling securities either reduce your proceeds or increase your costs and, therefore, have tax benefits only in the year of sale. Our fee is deductible every year.

@page_break@Client concern: I think I’d rather pay you by the hour.

Your response: In order for my services to be cost-effective, we base our fees on assets under management. I discourage working on an hourly rate, preferring to provide a high level of service to all my clients. This allows me to focus better on managing my client’s portfolios with the same devotion without worrying about hourly billing.

Client concern: Will I be paying extra for other advice you give me?

Your response: No. All of our services are inclusive under the fee arrangement. Your fee covers phone calls, meetings, ongoing investment advice and planning services.

Client concern: Where will my assets be?

Your response: Your assets will continue to be held where they are.

Client concern: What are the tax consequences of making this change?

Your response: Because we are moving your account as is, and not effecting any trades, there are no tax liabilities.

Client concern: I don’t think I want to do this. I like the commissions setup.

Your response: Because I will no longer be charging commissions, I would like to explain the benefits of the new arrangement:

> I will prepare a personalized investment policy statement that clearly identifies your goals, risk tolerance, time horizon and expectations.

> We will meet periodically to review your portfolio to ensure your goals are being met. If necessary, we will rebalance the portfolio to reflect market, economic or personal changes.

> By eliminating the conflict of interest inherent in commissions, I can better focus on performance, risk management and planning while keeping expenses down.

Client concern: I still don’t think I want to make the change.

Your response: I can appreciate your position and I understand your need to have a commissions-based advisor. Let me call you with a name of a reputable advisor who will be able to take care of your trading needs. I want to make sure you are happy with whomever you work with. In the future, should you need more comprehensive investment or planning advice, I hope you will consider me as a candidate to be on your team.

Note: For an excellent reference on the subject of converting your practice to a fee-based model, I recommend the book To Fee or Not to Fee, by Marc Lamontagne, available on www.tofeeornottofee.com.



> Referrals From Professionals

Advisor: Everyone talks about getting referrals from accountants and lawyers. But how do I actually do it?

Coach says: The simple answer: you earn the referrals.

Every advisor wants the implied endorsement and referrals that can come from good relationships with accountants and lawyers. Unfortunately, too many have been bombarded by requests for access to their client base — to the point at which they are, at the very least, skeptical of advisors’ motives or, at worst, defensively hostile.

If you pursue such relationships only to obtain referrals, you will set the stage for failure or, worse, damage your reputation. To be successful, you must firmly believe that creating professional relationships will benefit each other’s clients. You will also need patience, as gaining the level of respect and trust needed can take years.

Here are some suggestions to help develop relationships that ultimately lead to quality referrals:

> Take the path of least resistance. Ask clients for the names of their accountants and lawyers, how they selected them and what they like about working with them.

> Send an email or letter of introduction. State that you have clients in common (do not disclose names without permission) and suggest a meeting to discuss how you could work together to serve those clients. Do not suggest that the two of you could exchange referrals. Follow up by phone or email.

> Start small. Choose a client with a relatively small need for accounting or legal services and suggest to the client that you know a professional who could help and ask permission to contact that professional on the client’s behalf. Schedule a joint meeting with the client.

> Recognize that you may have to take a supporting role. Many affluent or high net-worth clients view their accountant or lawyer as their key advisor. Although you can be the quarterback with your own clients, when another professional refers a client to you, they usually expect to remain the primary contact.

> Don’t expect complete reciprocity. Never make a referral with the expectation of getting one in return. A high level of integrity will do more to develop your relationship with a lawyer or accountant than sending volumes of clients to them.

> Don’t rush to the altar. Before you collaborate with a lawyer or accountant on a client case, have in place a written agreement that covers confidentiality and non-competition. Revenue-sharing, if permitted, should come only when both parties are confident they want to continue the relationship. In fact, you may wish to avoid revenue-sharing completely to avoid any perceived conflict of interest. IE



George Hartman is president and CEO of Market Logics Inc. and a senior coach and facilitator with the Covenant Group. His latest book, Blunder, Wonder, Thunder: Powering Your Practice To New Heights, was released in January. Send questions, comments and opinions on any aspect of practice management to
george@marketlogics.ca.