Broker Check

Benefits of Converting to a Fee-Based Model

March 19, 2018
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Benefits of Converting to a Fee-Based Model

Today’s clients don’t want to take a hands-off approach with their money. They want to know how it is being managed, how their investments are chosen and if their long-term goals will be met. For these clients, a fee-based approach makes a lot of sense.

Advisors who have switched to a fee-based practice are enjoying many benefits. These are just a few you could be missing out on:

Removes Pressure to be a Salesperson

In a commission-based business, you’re in sales mode every time you meet with a client. Otherwise, you’re not getting paid for your time. Because a commission-based business is transactional, you’re always limited to the number of clients you can personally see and sell. In an advisory business, you can be successful without adding new clients, as long as you provide exceptional services to your existing clients.

Larger Share of Wallet

Fee-based accounts tend to be larger. A recent study found the average account size for a fee-based account was $256,400 versus $175,200 for commission accounts. Data suggests fee-based advisors are more successful in capturing a larger share of client wallet when using a fee structure versus a standard commission structure.

Fewer Compliance Headaches

No matter what the future holds for the Department of Labor’s fiduciary rule, more financial industry regulation is on the way. Regardless of when it arrives, it's going to hit commission-based advisors the hardest. Moving to a fee-based model now could make complying with future regulations easier, potentially lower costs and boost profit margins.

Spend More Time With Clients

The average advisor spends almost 40 percent of their time on administrative, operational and investment-related functions. The primary challenge to a commission-based practice is it’s constrained by the advisor’s time, which is why so many commission-based models eventually top out. If you’re seeing as many people as time allows, then there’s simply no room to increase volume. To make matters worse, if you don’t work, you don’t get paid. When you slow down, so does your income. This is a vicious cycle, so it’s no wonder record numbers of advisors are switching to a fee-based model.

Access to Third-Party Management

Finding the right investment option for your client can be a time-consuming process. While there are thousands of investment options to choose from, studies show most advisors tend to pick from a small handful of preferred fund companies.

In a fee-based model, you can access third-party managers. A third-party money manager can help enhance your investment offering by bringing in the right process and philosophy to manage your client investments in a goal-focused manner. That's great news for the advisor, their practice, and most important, their clients.

Increase the Value of Your Practice

Every advisor dreams of the day when they will retire, the culmination of what is for many, a lifetime of hard work.

For a commission-based practice, the payoff can be a letdown. Market data shows the average commission-based practice generally sells for only one times the trailing 12 month revenue. Why the markdown? Because the purchaser is essentially acquiring a list of warm leads.

For an advisory-based practice, the picture is far rosier. A well-diversified, advisory-based practice will commonly go for two to two-and a half times trailing 12 month revenue, because the buyer is purchasing something more valuable — a continuing revenue stream.

The combination of greater client alignment, more time, more revenue and more value are all tangible benefits you will see from a fee-based model.

If you haven’t switched to a fee-based model, it may be time to consider such a move. Contact Iron Point today for a no-obligation coaching call to learn more ways you can accomplish your business goals.