How to Convert Commission Assets to Fees

By Jack Waymire, President & CEO, Paladin Registry on Thursday, January 12th, 2012

I think most financial advisors know businesses that generate fee revenue are worth a lot more than businesses that generate commission revenue. In fact, they may be four to eight times more valuable.

Most commission businesses sell for 25% of revenue because new revenues have to be generated by sales activities. The buyer is purchasing a customer list and perhaps some goodwill, but there is no guarantee investors will purchase investment products from the buyer.

Compare that to fee businesses that sell for one or two times revenue. The value is much greater because the buyer is purchasing a repeat revenue stream with no sales activity required. If the buyer provides the same services as the seller, there is good chance investors will stay with the buyer.

There is another reason why advisors should aspire to build a fee for service business. In the commission world, advisors start the year with zero revenue on the books. All of the revenue has to be produced by new sales activities. Compare that to fee advisors who may start the year with $1,000,000 of revenue ($100,000,000 X 1%) on the books.

However, there is a major glitch – the $100mm of assets. Fee businesses make a lot more sense when advisors control a critical mass of assets. The challenge that faces most advisors who want to convert to fee business models is creating the critical mass of assets in a way that minimizes their potential loss of current income.

Following are a few tips that will help you make the transition process as painless as possible.

Commission Assets

There are two types of assets:

  • Dead assets that are not producing current commissions

  • Live assets that have the potential to create new commissions within 12 months

Tip #1: Focus on dead assets that will not produce new commissions any time soon.

Tell the Truth

Talk to the investors who own the dead assets and tell them the truth. You were paid commissions to sell them investment and insurance products. You were not compensated to provide “ongoing” advice and services that help them achieve their financial goals.

Tip #2: Tell your clients you want to change your relationship with them. Instead of selling them products, you want to provide continuous advice and services that will help them achieve their financial goals.

Create Value

Your biggest challenge is developing knowledge and services that justify the payment of ongoing fees. For example, one of your clients has $500,000 to invest. You want to charge the client a 1% annual fee or $5,000. The investor has to believe he will receive substantial value for this amount of money.

Tip #3: The more value you deliver the easier it is to make the conversion from commission to fee.

Key Services

There are four ongoing services that fee advisors provide their clients to justify the payment of continuous fees:

  • Ongoing advice that includes rebalancing and other strategic services

  • Meetings with clients four times per year to discuss market updates, concerns, investment expense, risk, and performance

  • Allocation and re-allocation of investor assets to money managers who have competitive track records and fees

  • Performance reports that are the focus of the quarterly review meetings

Tip #4: Make sure investors know what they are getting for the payment of fees. The more value-added services the better.

Performance versus Expense

It may be possible to move the investor’s assets to lower cost alternatives. For example, move the assets to index funds or active Separate Account Managers that have lower fees and reduced exposure to risk.

Tip #5: You may be able to save the investor enough money to offset all or a significant portion of your ongoing fee.

Same Side of the Table

Commission compensation means you sit across the table from the investor because you have to sell products to make money.

In a fee-for-service relationship you sit on the same side of the table as the investor because you do not have to sell to make money. You can focus on helping investors achieve their most important goals – for example, a secure, comfortable retirement.

Tip #6: Fees enable you to redefine your relationship with your clients. 

Jack Waymire spent 28 years in the financial service industry. For 21 of those years he was the president of a Registered Investment Advisory firm. He left the financial service industry in 2004 to promote a book he wrote titled Who's Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor.  Later that year he launched a websitewww.PaladinRegistry.com that used the principles in the book to pre-screen financial planners, investment advisors, and money managers for investors who used their services. In 2008 he also founded www.InvestorWatchdog.com, a website that gathers data from financial advisors and produces reports that investors use to make informed decisions when they select financial advisors. Additional reports on the Watchdog website also enable investors to monitor current advisors for performance, risk, and expense. Waymire is a columnist for Worth magazine, frequently quoted in the media, and a regular contributor to major blog sites.  

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