Growing with a fee-based model

During the fee debate on Advisor.ca, one of the comments made was that it was impossible to grow a business without DSC commission. DSC and fee-based commissions are both viable models, however, in the end, I chose to grow my book without ever charging a DSC.

The only way I survived those first lean years was by focusing on holistic financial planning. Here are several examples of how the holistic planning model can make financial sense for new advisors and for veterans looking to move to a fee-based practice. For each example I’ve provided two revenue scenarios based on targeting two different client groups.

Start with a comprehensive plan – charge for the plan

Clients have many goals and a comprehensive plan puts how and when we’re going to accomplish all those goals on paper. Having everything written down provides clients with clarity and confidence, and it gives us targets to work towards in the years to come. See a sample of our plans.

My first ever prospective client asked me “Can I give you $10,000 and see what you can do with it?” It was the hardest decision I ever made, but I said “No, you need a plan. And by the way, there’s a fee for the plan.” I explained why and they agreed to complete and pay for a plan. After presenting their plan, they transferred all their assets ($100,000+), put long-term care insurance in place, started an emergency fund, and now their children are clients. They’ve also referred two other families to my practice.

A comprehensive plan is good for clients because it addresses all their needs, and it generates higher revenue per family. Win-Win.

Example (modest): $750 x 20 plans per year = $15,000 of planning fees

Example (wealthy): $2,000 x 15 plans per year = $30,000 of planning fees

Protect their family and their plan

During the planning process I’ve found that most clients are not properly insured. Confusing accidental death insurance with standard life insurance is a common and risky mistake made by many clients. I’m not exaggerating when I say I’ve never met a working age client who owned a critical illness policy, and I’ve never met a client over the age of 50 with long term care insurance. As an industry we’re leaving our clients at risk. Helping them plan for those risks is a valuable service, and we are compensated for it.

Typically when we complete a plan, every new working age client purchases CI; clients without group coverage purchase DI; self-employed clients purchase health insurance; clients with children purchase term life; and clients approaching retirement purchase LTC. That often results in multiple policies per client.

Example (modest): 20 new clients per year x 40+ policies = $30,000+ commission

Example (wealthy): 15 new clients per year x 30+ policies (higher coverage) = $60,000+ commission

Manage their debt

Even the wealthy sometimes carry a monthly balance on multiple credit cards. Help clients organize their cashflow and lower their interest costs by consolidating their debt with a Manulife One account.

Example: 4 new M1 accounts per year x $400 = $1,600 referral fee + 0.1%/yr trailer on balance

To this point we haven’t discussed investments, yet we’ve generated significant immediate revenue. In a sense, helping clients meet their non-investment needs can replace the need for DSC during the first few years.

Consolidate their investments

A common misunderstanding by clients is that if they have their investments with multiple advisors they are diversifying their risk. Multiple advisors don’t communicate with each other which means the portfolio can end up too conservative or too risky; not to mention the estate planning nightmare it can create. Create a full plan for a client and the trust created will likely increase your assets/family from $10,000 to over $100,000 per family (as per my example above).

Example (modest): 20 new clients per year x $50,000 x 1% = $10,000 trailer

Example (wealthy): 15 new clients per year x $250,000 x 1% = $37,500 trailer

Don’t forget PACs

Most of my new clients were already saving monthly; they were probably saving 3-5% of their income. Creating a retirement and education savings projection as part of their plans shows them exactly what they need to save monthly to meet their goals. Usually that need works out to 10 to 15% of their income after the plan.

Example (modest): 20 new clients per year x $500/month PAC x 1% = $1,200 trailer

Example (wealthy): 15 new clients per year x $3,000/month PAC x 1% = $5,400 trailer

Help them achieve their life goals

Our plans include a section on planning for and achieving life goals. Whether it’s renovating the kitchen or taking a safari, we use Manulife Advantage Accounts to help clients save for these goals. Before you know it these accounts can grow to over $10,000/family.

Example (modest): 20 new Advantage accounts per year x $10,000 x 0.25% = $500 trailer per year

Example (wealthy): 15 new Advantage accounts per year x $40,000 x 0.25% = $1,500 trailer per year

The final count

No doubt the first year was tough but with steady growth and a holistic approach to planning my income has increased consistently each year since much of the revenue is recurring. Most importantly, with this approach I need far fewer clients to generate the same gross revenue – which is good for client service.

Much of my time during my first few years was spent designing a planning system to tie it all together for clients and I know I could have grown much faster had I known how to approach it holistically from day one. In fact, that experience is one of the main reasons for creating AdvisorPractice.com.

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Mathieu Paradis, B.Comm., CFP, CLU, FMA is co-founder of AdvisorPractice.com which offers advisors practical solutions to transition to a financial planning practice and offers a 12-week training program. He is a Financial Advisor and offers his clients comprehensive life goals financial plans.

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