Selling a move to fee-based practice

Advisor: I am acquiring a book of business from a retiring advisor. Among other things, I was attracted to this opportunity because most of the clients are fee-based, which I believe is the right way for me to run my practice. The sad irony is that my existing clients are still commission-based. Although I know having the “conversion” conversation with my current clients is the right thing to do, I have been reluctant to do so. I am worried about their reaction and the possibility that some will use the change as an excuse to move to another advisor.

Coach says: The trend toward fee-based compensation is a powerful one, with good reason. In most instances, clients are better served and financial advisors’ practices become more productive. But many advisors aren’t rushing to make the transition because, like you, they are concerned that their clients won’t like the new arrangement and, as a consequence, will leave.

However, in my experience working with numerous advisors who have made the switch, most clients will embrace the arrangement if they feel that the value they receive from the fee-based relationship exceeds the cost. That is no different from any other proposal you might make. If perceived value exceeds cost, your clients will agree and proceed. Your challenge, therefore, is to make sure the equation works out that way.

There are four possible outcomes when you introduce a fee-based compensation arrangement to your clients.

1. You will lose clients. Some clients will conclude that the fees exceed their perception of the value they receive from their association with you. Their dissatisfaction will lead to defection. There is also, however, an opportunity buried in this outcome. If you have clients you wish would leave, the introduction of fees may be just the thing that nudges them out the door!

2. You will undercharge. If you are not completely confident the conversion is the right thing to do, you risk setting your fees too low and ending up with fee-paying – but barely profitable – clients. When you evaluate the success of the conversion – say, at the end of the first year – you might have to go back to clients and raise their fees. That would be more daunting than implementing them in the first place.

3. You will overpromise. In an effort to justify your fees, you may attempt to elevate your service to a level far in excess of what you have delivered in the past. Your clients will be delighted because their perception of the value of your relationship will increase to exceed, ideally, the proposed costs. You, on the other hand, will feel undercompensated for your increased effort and the extra costs of delivering on your higher-service promise.

4. You will get it right. When you strike the proper balance among fees, service level and perception of value, everyone wins. Clients will feel better as a result of the increased perceived value of your service, which can manifest itself in a greater willingness to provide referrals. On the other side of the equation, you will feel vindicated by your clients’ positive reaction and the fact that you will be compensated fairly for your work.

– An effective communication plan

You can ease the transition to fee-based compensation by communicating your value proposition in a way that shows empathy, is specific and makes a compelling case for the concept.

Let’s try scripting some words you might use, beginning by demonstrating your empathy:

“John, I have spent a lot of time recently thinking about you and my other valued clients. In doing so, I have tried to put myself in your shoes, asking: ‘If I were John, what would I want from our relationship?’ I have come up with a number of things, but here are four that stand out: to be there when you need me; to act always in your best interest; to offer a complete range of solutions; and to provide value for the money you pay.

“John,” you would continue, “I would like to share with you what I think is an exciting evolution in my business, one that will elevate my ability to be of service to you. It will enable me to spend more time working on your behalf so you will never have to wonder if we are paying attention to all the things that might affect your financial situation. It also will open up a range of products and services we have not been able to consider previously in working toward meeting your financial objectives. Most important, the changes I am talking about will give you complete peace of mind that every recommendation I make places your interests above all else. Does this sound like something you’d be interested in hearing more about?”

Your client (hopefully) agrees.

Next, it is time to be specific:

“John, after thinking about the needs of my top clients like you and conducting an in-depth review of my business, I have concluded that the way I am currently compensated – through commissions on the products I sell – is unfair to both of us and it gets in the way of me doing the best job I can for you. I am proposing that we eliminate all commissions and, instead, work under a professional fee arrangement that is similar to how you might engage your lawyer or accountant.

“Specifically, the agreement I would like to have with you is…” (At this point, you would describe your fee structure, which might be an hourly fee, an annual retainer, an asset-based percentage or another arrangement. Give your client the opportunity to digest what you have just said and, perhaps, ask a few clarifying questions.)

Move quickly, however, to present your compelling rationale for the change:

“Before I ask you to consider this change formally, John, I would like to share with you some of the reasons I have come to this conclusion. (At this point, you would present your list, which might also be in writing):

1. Unbiased advice. “My advice will be completely unaffected by the products you acquire, so you’ll know we are always working as a team on your behalf.”

2. Broader product range. “There is a whole new breed of products on the market that do not pay a commission. They can provide new options for us to consider.”

3. Consistent advice under all conditions. “Markets go up and down; opportunities come and go. You’ll never have to worry about what’s happening in the world because I’ll always be there.”

4. Potential cost savings. “We’ll have more flexibility in using products with lower fees, such as no-load or exchange-traded funds. That may mean that your total costs actually drop.”

5. A more professional approach. “The processes we use will be designed to meet your needs, not to manage our costs.”

6. Service is more important than sales. “A focus on service allows us to implement more standardized processes to make the time we spend together more productive.”

7. Easier liaison with other professionals. “Many other professionals cannot share commissions, so a fee-based arrangement allows us to work more smoothly with your other advisors.”

8. Potential tax reduction. “Some portion of your fees may be tax-deductible; commissions are not.”

9. Shared risk. “I am in this with you. If your account value declines, so does my compensation. So I am motivated to get the best investment results without undue risk.”

10. Bragging rights. You’ll be able to tell everyone that you have graduated beyond the traditional “commission game.” Your financial affairs are being managed in an objective, transparent and inclusive way.

Concern about introducing fees is more in your mind as an advisor than in the minds of your clients. Any new clients will either be attracted to your practice by all its component parts or they won’t. Existing clients with whom you have valued, mutually respectful relationships will understand that you are proposing a win/win arrangement. IE

George Hartman is president of Market Logics Inc. and managing director, advisory services, with Accretive Advisor. Send questions, comments and opinions on any aspect of practice management to george@marketlogics.ca.

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