4 Transition Myths Addressed


The idea of transitioning from commissions to fees is not a new idea, yet many advisors still find that they have a significant portion of their business in direct mutual funds earning minimal recurring revenue. Additionally, advisors often find that, as their business grows, the confines of the commission-based structure limits the services they can provide to their clients—limits that fee-based advisors do not run into. Ultimately, these limits affect their bottom line.

It is hard to find an advisor who regrets making the transition to fee-based. We routinely hear stories of how advisors that made the transition wish they had done so sooner, how less worried they are about their income and how positive the feedback has been from their clients.

So, what are the reasons that hold some advisors back from making the transition? We have heard a number of them, and below are some of the challenges advisors have faced and eventually overcame during their transition to fee-based accounts:

1. A transition will be too time consuming.

While most worthwhile endeavors in life require effort, your transition doesn’t have to be overly time consuming. Depending on the size of your client base, you can break up a transition into manageable pieces over months or even years. And, depending on the volume of commissions you generate, going cold turkey may not always be the best strategy.

There is no doubt that it will take time to transition your business. If your business is like most, it should follow the 80/20 rule where 80% of your revenue comes from 20% of your clients. If that’s the case, you most likely haven’t been engaging with the other 80% of your business as often as you’d like.

A transition provides an opportunity to re-engage with your clients and share the new service and direction you are taking your business. You may even be able to uncover new areas where you can help your client. Maybe you can help them consolidate accounts, rollover a 401k or uncover other financial planning opportunities. As you move to fee-based, keep in mind that your time and planning advice are the services you provide. Investing your time with clients during a transition can yield many good results.

2. It’s too expensive for my clients.

There is a big “it depends” when it comes to fees. From a direct cost standpoint, when you consider the recurring 12b-1 and the upfront commission from a mutual fund transaction, costs can be about the same, depending on how often you sell funds to a client. And, keep in mind that you will typically use lower expense share classes when you manage fee-based accounts. So investment costs can be easily managed.

From a service standpoint, if you don’t change how you service your clients and just attempt to collect higher, on-going fees, then you certainly may struggle over costs during the conversion and ongoing relationship.

The best transitions introduce a new service structure to clients—one that is more aligned with client goals and outcomes than product sales. With that new service structure, your role and value changes. You are no longer a salesperson representing a fund company. You are a consultant advocating for your clients’ best interests and trying to address their planning needs.

More of your time is spent looking at a client’s broader situation, and less time is spent discussing specific investment funds. Essentially, every meeting and interaction turns into a value producing service, so the client is getting more from you versus when they were only a commission client.

Never forget that fee-based business is best delivered through a service-based structure. When you deliver more value through the services you provide, you should be compensated for that value.

3. I don’t want to rock the boat with existing clients.

Multiple advisors have told us that they just don’t want to rock the boat with their existing clients and that they’ll just use fee-accounts with new clients. To those advisors we say, “Why?”

While it may be the path of least resistance to only use fee-accounts with new clients, you may also potentially be setting yourself up for tough conversations, competitive threats, inconsistent messaging and missed opportunities.

From what we have seen, when you don’t have a single driving focus for your firm, you can get side tracked. Clients may talk to each other and get confused about what you are doing for their friend and why you may not be doing it for them. Clients may seek advice from other firms since they don’t know that you offer a particular service. And, you potentially miss out on opportunities to take a lead role in a client’s financial life, potentially opening the doors to more assets and a deeper relationship.

The bottom line is that you shouldn’t view a transition as a burden to you or your clients. But, you must create value through the added service and advice you will provide.

4. I don’t want to sell out of my best ideas.

The final objection we cover is investment related. We often hear advisors say:

  • I don’t want to say my prior advice was wrong.
  • I don’t want to realize gains for my clients.
  • I don’t want to sell out of my best investment ideas.

Often, as an advisor changes from being an investment generalist to a planner or even a wealth manager, they outsource some of the investment and operational duties for which they were responsible, allowing them to free more of their time to spend with clients. This is traditionally where the concern arises, since outsourcing may require a client to sell all of their current investments in order to move into a third-party, fee-based program.

However, outsourcing can be handled in many different ways. You can do it yourself on your broker-dealer’s platform or even try to do it directly on a custodian’s platform.

Additionally, at Bellatore we have successfully helped multiple advisors keep a good portion of their existing funds and best ideas while making a transition to fee-based accounts. We showed them a flexible approach where they could stay involved with the money management process, but be able to spend far less time performing due diligence and operational work. They didn’t have to sell their best ideas and were able to address low-basis issues with share class conversions and customized portfolio models.

Where there’s a will, there’s a way

Advisors have been switching from commissions to fees for over two decades, and the trend isn’t slowing. In fact, the trend has been accelerating as more advisors look to offer more than just investment recommendations to their clients. Many objections and challenges can be easily addressed and turned into benefits with the right partner and guidance.

As we mentioned earlier, it has been hard for us to find an advisor that regretted transitioning from commission to fees. It requires more than desire, though. You need to commit to getting the process started.