The Case for Fee-based Compensation

Fee or commission? The question continues to be debated in the financial services industry as advisors list their reasons for supporting one over the other.

Yet if you talk to your clients, the question has a very clear answer for them. In a recent poll conducted by Cerulli Associates, a Boston-based research firm, 50% of investors agreed with this statement: “I am willing to pay for advice regarding my financial investments.”

This thinking clears the path for the fee-based model of charging for advisory services. Clients looking for more transparency in a post-recession economy are looking for advisors to clearly demonstrate their fiduciary responsibility and build a more advice-based relationship.

With more investors seeking the fee-based model, how can advisors know when it’s right for their practice?

The Fee-based Differentiator

Given the option, Plan Sponsors are choosing to work with advisors who work on a fee-based compensation model. With or without the new fiduciary rules, the fact is if you’re unwilling or unable to work in fee based model, you’re putting yourself at a considerable competitive disadvantage. Educated employers will require it. Because we work with advisors regularly to help them move to fee-based, we know the transition is not difficult, nor administratively burdensome.

The benefit to your customers: increased clarity of the fiduciary role and responsibility. Also, clients feel confident the advisor/client relationship is based on clearly defined services for a clearly defined fee structure. With deliverables and compensation a known entity, client expectations are easier to meet and manage.

Appealing to New Clients

Advisors can make the new fee structure a selling point, making the fee conversation a mutual decision. Benefits advisors and clients are entering into agreements where the fee structure is completely customizable, and where it is contingent upon the quality and scope of the services provided. Up front, clients can choose from the services advisors provide and be charged only for those services they want or need. There’s more understanding of what’s being purchased, which brings added clarity and value to the advisor/client relationship.

Likewise, fees can be based on advisor expertise and performance. Best-in-class service models can earn advisors reasonable premium fees. Again, the fee parameters are mutually agreed at the outset of the relationship.

Making the Switch

The transition to fee-based compensation is not a difficult one. First, check with your firm. They will advise you on the requirements for transitioning a commission- based account to a fee-based account. Then develop a transition plan for phasing into the new compensation model. With a planned transition, you should be able to move seamlessly from one compensation model to another with minimal-to-no disruption.

If your firm isn’t interested in allowing you to work under a fee-based arrangement, you will be limited in the qualified plan marketplace. It could be time to consider your options, which may include finding a firm that’s more open to change.

Need help? Click on the Contact link to talk with us about how to make the switch, communicate the change to your clients, document the process, and manage a new way of working with your clients.