Advisers who have successfully transitioned their practice to fee-based models have shared their experiences at the FPA’s 2010 Small Principals’ Conference.
Relevant and thoughtful messages were given to advisers by three practice owners (Ian Donaldson, Ian Heraud and Deborah Rognlien), each of whom operate successful fee-based businesses that offer both investment and insurance advice.
While focusing on how each developed their fee for service models, the practice principals also shared other useful tips on what structures and activities have proven of value as they have grown their respective businesses, including:
- In an economic downturn, fee for service is a more attractive model than remuneration based on declining funds under advice
- As the client transitions to retirement, move them to fee for service as it offers greater certainty than a fee based on a percentage of funds under advice
- Before moving to a fee for service model:
- Define your service offer
- Decide what profit is appropriate
- Decide how to achieve this by working back from the desired outcome to determine what it will take
- Suggestion to move risk commissions across the board (all insurers) to, say, 50% upfront commission and 20% – 25% ongoing. This will increase the value of the business and make it more sustainable.
- Involve your staff. Ask them to analyse what it takes (their time and cost) to place a client ‘on the books’.
- Don’t produce any reports for free – consider how accountants and solicitors structure their fees
- Create a professional fee agreement, which includes ensuring the client keeps the adviser informed about their circumstances
- Document this agreement – critically important
- A minimum fee should be applied for all clients, but this can be changed if the client becomes a source of productive referral business
- Fee for service – the adviser doesn’t do any work before they get paid, versus commission, where much valuable work may go unrewarded
- There is no single correct fee for service model – it depends on the adviser and the nature of his/her business
- First client meeting to be a cost to the business, but charge a fee from that point. This cuts out those clients who are not serious about continuing and avoids working long hours on developing an advice solution that may eventually not be taken up by the client.
- For small practices in particular, use a single investment platform. This contributes to much greater business efficiencies.
- Avoid the temptation to structure individual deals. Offer value-added ‘sweetners’, but don’t change fee structures.
- For clients who do not agree to transition to fee for service, maintain the relationship, but the new service proposition will not apply to those clients
- Client segmentation must be done and the value proposition clearly communicated
- Perception – like it or not, commission-based advice may be seen by the public as conflicted
- Forget about charging an hourly rate!
