Switch clients to your form of comp

While some advisors are choosing a fee-based service model instead of commissions, others are going the other way. So how do you keep clients when you change how you’re paid? By being transparent.

Janet Baccarani, CFP at Dedicated Financial Solutions in Mississauga, Ont., started switching clients to fee-based last year. “We told them it’d actually reduce their fees,” she says. “We did calculations showing the amounts the MERs would be reduced on the F-class funds compared to regular advisor-series funds.” She notes switching to fee-based will save clients about 1.1% on the MERs.

Because many clients still have deferred sales charge funds, Baccarani can only switch the front-end units. Each year, she’ll take the additional matured units and move them over as well. This way, she says, their savings increase annually. She estimates in year one, clients with about $800,000 in assets have saved $300 to $400 on average. And clients with non-registered funds save more because the fee is tax deductible.

Read: 3 tips to explain compensation

Since she sees the industry is headed toward fee-only advice, she says she’d rather transition sooner than later. “We like to be a step ahead so we’re not being forced into something that’s time-sensitive.”

Pros and cons of switching to fee-based

Advantages:

• Fees are invoiced separately.
• Clients often get more involved in the financial planning process because they can see the services that are offered, says Natalie Jamison, associate director, Wealth Management Wealth Advisor at ScotiaMcLeod. This means there are more opportunities to improve financial literacy.
• It’s easier to predict what your revenue is going to be, and it’s a steadier income stream, notes Janet Baccarani of Dedicated Financial Solutions.

Pain points:

• It’s costly for clients with less than $250,000. For instance, DundeeWealth’s fee account has a $125 per-month fee minimum, so that’s $1,500 per year, says Bruce Cumming, a senior investment advisor with the firm. “So if I had a client account that was $250,000 and I’m charging 1%, that works out. But if I have a client who only has a $40,000 portfolio and they’re paying $1,500 a year in fees, then that’s 3.75%.”Cumming places smaller clients in mutual funds where the front-end is zero. “This isn’t what I want to do but my dealer has this threshold limit. The industry is going to have to tell us how they want us to handle smaller accounts, or the lower end of society won’t be able to get professional advice.”
• There’s added paperwork because you have to cancel the client’s accounts and open up new ones. Baccarani adds it’s time-consuming to calculate which funds clients will save money with.

Meanwhile, Bruce Cumming, senior investment advisor with DundeeWealth in Oakville, Ont., made the switch from commission-based MFDA to IIROC five years ago so he could offer indexes through his firm’s fee-for-service account.

“I had to close clients’ old accounts and open up new ones to get their money into [the account],” he says. “This means mutual funds were sold and we purchased ETFs in the fee-for-service account.”

Read: Follow the U.K. on compensation reform, says OSC panel

Cumming recalls it being an easy transition. “I explained they’d previously purchased all the mutual funds on a front-end basis at zero, and my sole compensation came from the 1% trailer fee earned from the mutual funds,” says Cumming. “Now that same 1% was going to be charged in the [new] account. So their expenses were going to be lower because the ETFs had a lower MER, but my compensation remained exactly the same. This wasn’t a grab for me against them, and they were totally neutral.”

He also told clients their statements would show the actual cost of his advice so they could judge whether it was worth it or not.

Advisors who aren’t in a fee-based practice expect their revenues to decrease an average of 1% if they convert, says Advisor Group’s 2013 Salary Survey.

I object

Getting clients to switch isn’t always easy, and they usually wonder if it’ll cost more. And this happens whether clients choose fee- or commission-based services, says Natalie Jamison, associate director, Wealth Management Wealth Advisor at ScotiaMcLeod in Oakville, Ont. She offers both compensation arrangements, depending on client preference (see “Should clients choose fee or commission?”). “We alleviate fears by producing a detailed report analyzing the cost benefits of making the switch,” she says.

Read: Supreme Court upholds investor rights

Cumming admits he’s had a handful of clients question the value of his services once they see how much they’re paying. To justify the fee, he reiterates all the services he offers. So, a client may initially be reluctant to discuss estate planning. But, once he realizes the service is included in the fee, he’s more open to the idea. This provides Cumming additional opportunities to help.

Baccarani’s also had clients complain. “Even though we discussed it, they find it irritating once they actually see the fee [instead of it being hidden]. That’s led some to decide to pay it from within their investment accounts. An advantage of getting it to come out of a RRIF or RRSP is that it’s tax-free.”

Further, clients who have credit cards offering bonus rewards or points have opted for unembedded fees, since that structure lets them place the costs on a charge card and cash in on the expense.

Read: What is the future of compensation?

For those who still object, Baccarani advises trying fee-based for a year, and then revisiting calculations to ensure they saved money. She also explains there are no penalties if they decide to switch back.

Advisors who switched to fee-based say their revenues increased by an average of 17%, according to Advisor Group’s 2013 Salary Survey.

Should clients choose fee or commission?

Natalie Jamison, an advisor at ScotiaMcLeod, uses these criteria to determine if clients should be in fee or commission.

Fee-based

• For easy rebalancing. In markets that move sideways, a buy-and-hold approach doesn’t always work. “By trading the highs and lows and rebalancing often, we can yield significant results,” she says. “However, no client wants to do that if it’ll cost him for each individual trade, so fee-based makes sense.”
• To remove emotions. It’s effective for clients who have a hard time making decisions or committing to a strategy. “I tell clients this is similar to working out. Yes, you could work out by yourself in your basement, for free. But, if you can’t maintain the fitness routine, then it’s worth paying for a personal trainer who will ensure you get the results you’re looking for,” she says. By choosing discretionary and fee-based, clients get a money coach who can take care of their portfolios.
• For busy investors. If people are balancing career and family, they often don’t have time to be involved with day-to-day decisions about their portfolios or asset mixes. By going fee-based, review meetings become more focused on what is important to clients, such as charitable giving, education, or legacy planning.

Commission-based

• Depending on investments. After assessing a client’s investing habits, emotional reactions and asset mixes, fee-based may not be the right fit. “If I get a new client who has already done in-depth financial planning, and he doesn’t need extra wealth management services, then he’s better off paying à la carte for the trades he does.”
• For someone who holds investments. If a client doesn’t plan on trading stocks, then why charge a fee for holding a stock? He’s better off in a commission account. “We point out the savings and this proves we’re concerned more about growing our clients’ wealth than making money.”

Suzanne Sharma is the associate editor of Advisor Group.