Fee-dom

(July 2005) Slowly, but surely, our industry is experiencing a persistent shift away from upfront commissions and toward asset-based fees. Every year, more and more advisors are earning at least some of their keep through fees.

Advisors at all income levels project they’ll be working on a fee basis by 2007 (see chart below). As usual, higher-income advisors lead the way — by 2007, more than three quarters say they’ll be generating revenues entirely through fees.

If you’re contemplating a shift to fees, consider your motivations carefully before taking the big step. Many advisors convert to fees simply because they believe clients will prefer working on that basis. The reality is most clients don’t care about the specifics of compensation. They’re far more concerned about whether they’re getting real value and that the compensation paid is equitable. However, you should be quite concerned with how you’re compensated and how it affects the success of your business.

Working on a fee basis supports your success in three key ways:

• A fee basis fosters the consultative process. By using a methodical approach to uncover each client’s financial goals, values and needs, and then formulating and implementing a comprehensive solution for the long term, you become the trusted advisor your clients are looking for.
• The recurring nature of fee revenue lets you focus on clients. When you wake up each morning under pressure to make enough sales to pay the bills, it’s tough to focus on satisfying your clients. But when you have the security of recurring monthly revenue, you’re freer to concentrate on clients’ long-term financial needs and on providing a high level of service and ensuring satisfaction.
• Fees support a higher valuation for your business. A good rule of thumb for valuation of commission-based practices is 0.5 multiplied by revenues. In contrast, the numbers are much higher for firms that generate most of their revenues from fees: 1.3 to 2.5 multiplied by revenues.

If you’re motivated to convert to fees simply to earn more money, you’re missing the point. How much money you end up making has less to do with how you charge your clients than it does with how well you take care of them. And, of course, you should never convert a client to fees if it’s not in his or her best interest.

Fees require a fundamental alteration in how you do business. Before you make the move, make certain you’re doing it to deliver value and provide top-shelf service while ensuring a healthy profit for your business.

Copyright 2005, CEG Worldwide, LLC. All rights reserved. John Bowen is founder and CEO of CEG Worldwide, a U.S.-based global training, research and consulting firm.“The Bowen Report” appears monthly.

(07/19/05)