Transitioning from a commission-based business to one driven by fees can be a rewarding and profitable move. Additionally, the benefits to your clients, your business and your quality of life are well worth the time it takes to make a transition. Let’s look at the top five business benefits you may receive from converting to fee-based:
1. Remove Pressure to be a Salesperson
Are you tired of having to “sell” every time you meet with a client? In a commission-based business, you are in selling mode every time you meet with a client. Otherwise, you are not getting paid for your time.
The fee-based business model is different. Since you are compensated on an ongoing basis, time spent with your client is just part of the service you provide. There is no pressure to sell, and, when you remove that pressure, you can start to establish deeper relationships with clients and focus on what really matters to them.
We like to position the fee-based advisor as one that is truly able to sit on the same side of the table as their client and work as a client advocate. In fact, when you conduct fee-based business, you are obligated to do so. All fee-based accounts are held to a fiduciary standard of care. That fiduciary standard of care comes with the responsibility of having to always provide solutions that are in your client’s best interest. When a client knows you are fully aligned with the goal of achieving their financial success, it’s a night and day difference from a commission-based sales approach.
Are you a consultant or salesperson? Fiduciaries provide advice and earn a fee for that advice. Here is a comparison of professions that are considered fiduciaries:
|Type of Professional||Are They a Fudiciary|
|Registered Investment Advisor (RIA)||Yes|
2. Increased recurring revenue and business value
Imagine starting the year generally knowing how much income you are going to make. When you have a business that is built on fees instead of commissions, you generally know at the start the year what your fee revenue looks like. You don’t have to approach every day with the mindset of “sell, sell, sell” to make ends meet. Instead, you focus on maintaining and servicing your existing relationships. The beauty of fee-based business is that it offers recurring, and more consistent revenue that you will receive throughout the year.
On an annual basis, fee-based business pays better. Yes, a commission-based transaction comes with a hefty up-front load, but the ongoing fees are quite low and commissions can be inconsistent. The fee-based model helps moderate this since the ongoing rates each account is charged varies. One study found that fee-based businesses earn an average of 1.18% per fee-based account versus 0.54% for commission-based accounts (source: PriceMetrix). That’s real money!
In addition to higher revenue, a fee-based business is also usually worth more than a commission-based business. One common way to value the equity you have in your business is to apply a multiple to your revenue. Typically, the multiple applied to fee-based, recurring revenue is significantly higher than the multiple applied to transactional, commission-based revenue. And, there is an added business equity benefit. Since you typically earn more ongoing revenue from a fee-based account, you have more revenue on which to apply a multiple. It’s a powerful business equity combination since you pair higher valuation multiples with higher revenue.
Revenue source: PriceMetrix
Value source: http://www.investmentnews.com/article/20130612/FREE/130619994
3. Faster growth
When converting your business to fees, faster growth can be achieved in two ways. First, your revenues are able to grow faster. PriceMetrix, in a study titled “Transitioning to Fees,” found that the more dedicated you are to growing fee-based business, the faster your revenue grows. The results of their study are presented in the table below. You can easily see that advisors who increased their percentage of fee-based assets by at least 25%, were able to grow their revenue by 47% over 3-years. That is more that two-times faster than advisors who increased their fee-based revenue by less than 5%.
Three-Year Revenue Growth by Advisor Fee-Based Asset Ratio Growth 2009-2012
|Increased by less than 5%||Increased by 5% to 10%||Increased by 10% to 25%||Increased by 25% or more|
|3-Year Revenue Growth||19%||25%||31%||47%|
The second reason is that fee-based accounts tend to be larger. The same PriceMetrix study found that the average account size for fee-based accounts was $256,400 versus the commission account average of $175,200. Therefore, fee-based accounts are typically 46% larger than commission accounts.
Why is this? From our discussions with advisors, we have found that they are more successful in capturing all of a client’s assets when using a fee structure versus a commission structure. So, not only are your ongoing fees higher than 12B-1 accounts, you can earn more since the fee-based model may allow you to capture a larger portion of a client’s assets.
4. More time with clients
Advisors spend as much as two days a week, on average, focused on administrative, operational and research-oriented activities. While these functions are essential to any investment business, they keep an advisor away from doing what they do best—working with clients. It seems fairly common among independent financial advisors that they try to keep costs down by doing all these activities themselves. The reality of the situation, however, is that if you don’t have an administrative assistant, then you are one.
Advisors that are able to hire administrative staff or partner with a firm, like Bellatore, that specializes in supporting an advisor’s fee-based needs—model management, trading, billing and reporting–are able to focus more time on client relationships and more time growing their business.
Get back 2 Days
The average advisor spends almost 40% of his or her time on administrative, operational and investment duties. That is time spent away from directly servicing clients and growing their business. Partnering to manage fee-based accounts can help free your time.
5. A deeper bench
Finding the right investment option for your client can be a time consuming process. While there are hundreds of managers available and thousands of investment options to choose from, most advisors have tended to pick two or three preferred fund companies and use their available investment options.
When doing fee-based business, you can more easily implement additional managers. In fact, we have helped many advisors leverage the services of a third party money manager to enhance their investment strategies. A third party money manager can help enhance your investment offering by bringing in the right people, process and philosophy to manage your client investments in a goal-focused manner.
Every advisor is different. Some advisors feel comfortable spending their time and energy on investment manager due diligence, fund selection and asset allocation. Other advisors search for a competent team of professionals with whom they can consult or have manage the investments of their client portfolios. Choosing the right partner can help deepen your bench and increase your confidence in your investment management offering.
Do More with Your Business
The beneficial combination of greater client alignment, more time, more revenue and more value are all quantifiable benefits you stand to receive from a well executed transition to a fee-based model. It is fairly easy to see why a change from commissions to fees can have profound and lasting benefits to your business.
To read about the investment benefits for transitioning to fee-based accounts, click here.