Transitioning to Fee-based Financial Planning: A Story From the Field

The American College of Financial Services
November 25, 2016

A recurring trend in the financial services profession has been a shift from commission-based business models to fee-based models. In Canada, 98 percent of financial advisors have completed the transition to a fee-based compensation model, while advisors in the United States are steadily catching up. In 2014, more than 50 percent of financial advisors were using fee-based compensation models in the United States.

Part of this group is Brian J. Carney, CFP®, ChFC® and partner at the Delaware-based Blue Rock Financial Group, who successfully transitioned his firm from a traditional model that focused on selling investment products to a fee-based financial planning practice.

Researching benefits for retirement fees

In an interview with The American College of Financial Services, Carney shared the benefits and difficulties of adopting a fee-based model as well as the insightful question that motivated his decision to switch. Carney advised colleagues that setting up and getting used to a fee-based model may be difficult in the short term but, "it frees you up in the long-term to set-up a business that you'll really be happy about."

Assigning Value to the Financial Planning Advice You Provide

Carney said he noticed that the questions he received from clients were increasingly less focused on products and more focused on retirement planning and strategy. "I started to get a lot of questions from clients and prospects and even centers of influence, questions like 'When should I take our Social Security?' and 'How should I allocate my 401(k)?'"

Addressing the proliferation of questions like these, one day a colleague said to him, "If you don't charge for your advice, then what's it really worth?" Soon after, Carney switched to a fee-based advisory model that valued and monetized the guidance his clients requested. While switching to a fee-based business model may seem like a challenging transition for financial planners accustomed to operating under the traditional commission-based model, many advisors like Carney believe the following benefits justify the work involved.

Benefit: Create Recurring Revenue Streams

One of the most attractive benefits of adopting a fee-based, advice-centric business model is that it offers recurring, consistent revenue streams throughout the year. Additionally, fee-based businesses generate more revenue annually than commission-based ones because the majority of the revenue made from commission-based transactions is frontloaded, whereas with fee-based models moderate this inconsistency by varying the ongoing rates that each account is charged. Studies show that advisors who increased fee-based ratios of business by at least 25 percent transformed revenue streams to be more than two-thirds recurring and saw a 41 percent overall increase in recurring revenue.

Benefit: Reinforcing Recommendations Increases an Advisor's Value

Adopting a fee-based business model creates an enhanced focus on the client's financial plan instead of the investment products behind the plan. Traditional commission-based advisors develop financial plans, but once the plan is created and delivered the advisor’s obligation to the client ends. Since fee-based advisors are compensated on an ongoing basis and time spent with the client is all part of the fee, they have an enhanced focus on the client’s financial plan, not just the products behind it. Fee-based advisors are obligated to provide a fiduciary standard of care, including a thorough explanation of the client’s financial plan. Clients are increasingly asking questions about what to do with their money and why they are saving it, Carney said. Showing clients a personalized financial plan and reminding them of their goals every year will reinforce your recommendations, increasing your value as a financial advisor and retirement income expert.

Benefit: Trust and Confidence Through Fee and Compensation Transparency

Carney said one of the biggest weaknesses of the commission-based model is that clients often lack a clear understanding of what the costs are and how the advisor is compensated. This is one problem that the U.S. Department of Labor’s Conflict of Interest Rule aims to solve by requiring that any individual giving retirement advice be a fiduciary who practices according to the best interest of the client. The rule requires all fiduciaries to disclose information about fees and any existing conflicts of interest to clients. Being transparent about fees and fee structures will make clients feel comfortable and instill trust that the advisor has their best interest in mind.

Despite significant advantages, fee-based models are not without flaw. Detailed next are potential difficulties and challenges faced by advisors who implement a fee-based compensation practice.

Difficulty: Fee-Based Models are Service-Intensive

A drawback that may give advisors pause when considering switching to a fee-based model is the increase in staffing it requires. Charging set fees for service and advice heightens client expectations as they’re now being billed for intangibles. Carney cited the need for skilled, educated professionals in place who can seamlessly manage clients’ requests as well as proactively hold clients accountable to their goals and financial plans. For some practices this requires investing in hiring additional personnel, while for others it can mean investing time in pursuing advanced education to develop rich expertise in areas like retirement income planning or estate planning.

Difficulty: Fee-Based Structures Work Better for High-Net-Worth Clients

Moving to a fee-based business model will not work for every client. Carney reported that one of the biggest disadvantages to the fee-based model is that it can limit an advisor's market on the lower end. Middle market clients may be hesitant, unwilling, or unable to pay fees typically equivalent to thousands of dollars annually.    

Advisors who have been considering the switch but aren't sure must consider the type of work they do and clients they wish to serve. Carney cautions that not every client is right for the fee-based model, and that's OK. "Quite honestly not every client needs that type of model," Carney said. The important thing for advisors to keep in mind when educating clients about fee-based and commission-based models is the distinction between financial planning and investment management.

If you decide that making the transition to fee-based is an advantageous move for your practice, you should inform prospective and current clients about the distinction between a financial planner and an investment manager. Explain how they are separate roles, what clients can expect from an advisor in each capacity and what your advisor/client relationship will look like. Clients should know that financial planners have the role of investment manager wrapped into their job description, but investment managers are not necessarily qualified or capable of being financial planners. Understanding what level of service your book of business requires (or can bear) will help you decide if the shift to fee-based makes sense for your business.

Once clients have a clear understanding of the difference between financial planning and investment management, the conversation about switching to a fee-based business model will become easier.

As 10,000 boomers reach retirement age everyday, thousands of advisors are choosing to specialize their retirement income planning expertise with advanced training and skills. Many of these same advisors have found a fee-based model aligns well with the advice-based relationships retirement-aged clients need. Learn more, including how to become your client’s trusted retirement income expert by reading, Retirement Planning for Longer Life Expectancies.