Commission to Fee Only

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intrigued's picture
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Joined: 2007-05-27

I have gone from a broker based practice to a fee only independent practice.  I have one client that invested with me right before I converted.  How do I make this right now to her in my billing? Do you give the client credit for the commission paid and then subtract from that fees earned until they owe you? I'm also not sure if I charge her for the last quarter of last year when doing these calculations.What is common practice? Thanks

anonymous's picture
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Joined: 2005-09-29

How do I make this right now to her in my billing?
You make it right by never billing her for this money.  She made an investment knowing what the costs will be both from an upfront commission standpoint and an ongoing basis. 
 
 

theironhorse's picture
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Joined: 2007-03-03

I agree. 

intrigued's picture
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Joined: 2007-05-27

So if I understand correctly...when you converting commission based clients to fee only...you charge only on new money?  The brokerage firm I was with had some kind of formula for converting commission clients to the advisory side of the business...I believe they billed the current advisory rate...and then credited commissions paid by the client until the client used up the commissions.

Morphius's picture
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Joined: 2007-07-21

intrigued wrote:I have gone from a broker based practice to a fee only independent practice.
I think you need to clarify what precisely you mean by an "independent fee only practice."  People often times use this term very loosely.Are you an RIA?  A rep with an independent B/D?

Broker24's picture
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Joined: 2006-10-12

intrigued wrote:So if I understand correctly...when you converting commission based clients to fee only...you charge only on new money?  The brokerage firm I was with had some kind of formula for converting commission clients to the advisory side of the business...I believe they billed the current advisory rate...and then credited commissions paid by the client until the client used up the commissions.
 
That's a reasonable strategy.  The only problem is if you sold them on the merits of A Shares last week, and this week you are selling them on fees. 

newnew's picture
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Joined: 2007-02-23

if you charge your fee on top top of index funds or ETFs, then they are NOT paying more (after you figure in the trading costs AND the expense ratio/12b1s of those actrively managed funds). The loads were ON TOP of all that--so moving forward as of today the costs aren't much different either way. And even if they are slightly more now with the fee, it is worth it to not have all your money with one fund family just to hit a stupid breakpoint.

Dark Knight's picture
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Joined: 2008-01-30

your idea to credit them for commissions paid sounds very fair to me. 

Dark Knight's picture
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Joined: 2008-01-30

anonymous wrote:
How do I make this right now to her in my billing?
You make it right by never billing her for this money.  She made an investment knowing what the costs will be both from an upfront commission standpoint and an ongoing basis. 
 
 
 
What a perfect illustration of the problems of upfront commissions.  How in the world can he service the account for no compensation till the end of time? 
 
I promised my high school girlfriend that I would always love her no matter what.  How do you think that turned out?
 
The world changes.  All promises cannot be kept.  This client is more than welcome to reject the fees and stay with the prior firm or go elsewhere.

anonymous's picture
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Joined: 2005-09-29

 You seem to be missing the part where he said, "I have one client that invested with me right before I converted."  He knew that he was making the switch.  Therefore, he should either have not taken her on as a client or he shouldn't be charging her a fee for that portion of the money.
 

Dark Knight's picture
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Joined: 2008-01-30

Yes, he made a mistake, but he obviously can't go back in time and change it.  If he clearly explains the pros and cons of fees, and gives her an equivalent number of years free then allows her to make the choice to stay or leave then I think he has made up for his sins.   

Morphius's picture
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Joined: 2007-07-21

Morphius wrote:
intrigued wrote:I have gone from a broker based practice to a fee only independent practice.
I think you need to clarify what precisely you mean by an "independent fee only practice."  People often times use this term very loosely.Are you an RIA?  A rep with an independent B/D? Intrigued,In addition to the advice you are getting here, you also need to recognize that there is a compliance element to whatever you wish to do with fee adjustments.  The particulars vary depending on your specific legal status as either an RIA or RR of a B/D, which is why I asked the question earlier.Which is it?

theironhorse's picture
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Joined: 2007-03-03

The point is (and I do not know the actual timeline of this specific client) you cannot sell them A shares Monday and then Tuesday say you had a revelation last night and realized fee based is the way to go.  He likely knew he was going fee based when he made the original transaction, so "fixing it" now can be problematic.

intrigued's picture
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Joined: 2007-05-27

I'm an independent RIA.The situation was I was with a broker/dealer that I could do advisory business with at the time but the cost to the client would have ended up at about 2% vs 4% load. I chose what was best for the client at the time.  I left the broker/dealer because I found their fees on advisory business was ludicrous.As for compliance the wording in my adv says up to x%...but I do have provisions in the wording for discounts.

anonymous's picture
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Joined: 2005-09-29

Intrigued, I've always wandered why someone would go fee-only.  Simply from the insurance aspect, it seems like a mistake, since you can't adequately help them in that area.  Do you tend to ignore insurance subjects or do you send them to somebody else or are you not fee only?

Morphius's picture
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Joined: 2007-07-21

intrigued wrote:I'm an independent RIA.The situation was I was with a broker/dealer that I could do advisory business with at the time but the cost to the client would have ended up at about 2% vs 4% load. I chose what was best for the client at the time.  I left the broker/dealer because I found their fees on advisory business was ludicrous.As for compliance the wording in my adv says up to x%...but I do have provisions in the wording for discounts. Keep in mind that simply calling something a discount does not necessarily make it so from a regulatory standpoint.  Depending on the specifics, it sounds to me like what you are describing might very well be considered by the SEC as a commission rebate or recapture, not a fee discount.  Does your ADV address either of those topics?

Borker Boy's picture
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Joined: 2006-12-09

When Jones goes to the advisory account, will we be converting old A shares over?
 
I guess I assumed that A shares would stay as such and only new money--from new clients--would be going into the fee-based account.
 
Now I'm confused.

Spaceman Spiff's picture
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Joined: 2006-08-08

I'm afraid that's a detail they aren't really going to let out of the bag until summer regionals.  I've heard rumors that they've addressed the issue, but no details.  The comment from the GP went something "if you have a client who paid you commissions recently, but would like to switch to fee based, you'd like to reimburse them for the commissions they already paid, wouldn't you?"  Take that for what it's worth.

Morphius's picture
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Joined: 2007-07-21

Borker Boy wrote:When Jones goes to the advisory account, will we be converting old A shares over?
 
I guess I assumed that A shares would stay as such and only new money--from new clients--would be going into the fee-based account.
 
Now I'm confused.I'm no Jones expert but no client can be 'converted' to an advisory account without their explicit  approval and repapering of the relevant accounts.

newnew's picture
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Joined: 2007-02-23

I heard they must be at least 4 years into Ashares first before the "switch".

Morphius's picture
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Joined: 2007-07-21

iceco1d wrote:Nope, not at my firm.  Anything that's hit its 3 year anniversary.  It's a brand new "strategic initiative."  I haven't a) done any transaction biz, b) been a rep for 3 years, so I c) don't have to worry about it.  d) yet! 

intrigued's picture
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Joined: 2007-05-27

anonymous wrote:Intrigued, I've always wandered why someone would go fee-only.  Simply from the insurance aspect, it seems like a mistake, since you can't adequately help them in that area.  Do you tend to ignore insurance subjects or do you send them to somebody else or are you not fee only?I refer insurance business to someone else. At a future time I may get my insurance licenses and change my adv, but for the present time I have my hands full with what I do now. 

jwcopper's picture
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Joined: 2008-05-13

It is likely they would get a fee credit depending on how long ago they bought from you, you made a commission.  Safest thing to do is avoid converting any existing clients for 2 years unless they ask.

troll's picture
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Joined: 2004-11-29

Am I reading this correctly, you are discussing how quickly you can move an A share to fee based?  2 YEARS jw?  You have got to be kidding me!!  If you start a client with a commisioned product, then later decide that fee based would be better FOR THAT MONEY, you should wait longer than two years.  My firm is also 2 years to move, however if you bought something less than 5 years ago, I do not make the move.

jwcopper's picture
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Joined: 2008-05-13

Understand 2 years is the minimum.  If someone is in A shares with a $500k breakpoint, and it is 2 years later, I really don't see a major problem there.  If it was $25k 6 months ago, of course you have to wait a heck of a lot longer.  Also remember most firms do a fee credit to reduce fees until the client is made whole on the commissions paid.  What is completely wrong is to hit the client for 6% commission, then move them to fee based weeks later, and start charging fees.  Every situation must be looked at thoroughly, and best interest of client comes first obviously.  I did not realize my previous post needed to go into these details, did not realize the level of cynicism was so high.

troll's picture
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Joined: 2004-11-29

How many investment strategies do you give up on after 2 years?   Mutual funds are long term investments.  If it were a short term investment you should have used C shares.  If someone agreed to pay a commission on day one breakpoint or not, I do not believe they should be moved to a fee based account in general.  Of course there are unique circumstances that would dictate the move, but in general no.  Here is my rule of thumb, (assuming good reason) would you move client to another fund family into another A share?  Find me someone who does it in 2 years and I will show you someone who compliance is watching closely.  My objection is people taking a good fund and sliding the same fund into a fee based account after a certain amount of time.  I do not care if it is 10 years, in my opinion this is wrong. 

Borker Boy's picture
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Joined: 2006-12-09

I'll second you sentiments, Primo.
 
Unfortunately, you can bet your bottom dollar brokers from every firm in the country are foaming at the mouth to get those A shares converted over to fees. I'm just not a good enough salesman--or unethical enough--to come up with a convincing argument about why a person is better off making the switch in mid-stride.
 
A shares are presented as being the least expensive way for long-term investors to buy mutual funds. 
 
A shares should remain as such.

Spaceman Spiff's picture
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Joined: 2006-08-08

A shares will remain the least expensive way for the long-term investors ro buy mutual funds.  Lest expensive doesn't always mean the best.  My Taurus is cheaper than your AMG. That must mean my Taurus is the best car, right. 
 
Don't get me wrong, I love A shares.  But you have to admit there are some limitations to the model.  For instance, I was looking at a client's porfolio yesterday.  I used Lord Abbett 2 years ago with this client.  Just barely hit the $100K breakpoint.  He's not really all that happy with his returns and neither am I.  I'd love to do something different with the money, but we're kind of stuck.  And internal exchanges don't really gain me anything at LA.  My FSD would put me on her speed dial if I made a wholesale change to AMF or FT.
 
So, if we stick with LA it will be a very inexpensive portfolio over the long run.  But can I make him enough money to keep him around for the long term?  Great service only goes so far.  At some point it's all about the Benjamins. 
 

Borker Boy's picture
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Joined: 2006-12-09

I love all of the cozy rhetoric about how CSE and relationships are what keep clients around, but I have to call BS on that. People invest money to make money. Period. End of story. I don't have a single client who brought me their money because they wanted a new friend who would give them a phone call every few months.
 
The car analogy is one of my favorites, but I use it to convince people that paying me a load is the best thing for them to do. (I'm not personally convinced of that, but I'm in a tough spot since it's impossible to put food on the table while working for free.) 
 
My position is that existing A shares must remain as such. When the fee based platform rolls out, we'll have the opportunity to utilize a variety of different fund families for a flat fee, and we can kick the under-performers to the curb much more economically.  
 
I agree that LA is sucking pond water. I opened a pretty big 401(k) with them a couple years ago, and the company's employees are wondering what the heck I was thinking. Regardless, I just refuse to jump ship, or even consider doing so, after two years of less- than-stellar performance. LA is a good fund company, and they will get their act together before too long.
 
Besides, we'll never bat 1000, and that's the beauty of using mutual funds...they will rebound over time. (Or at least that's what I've been trained to say.) 
 
And I do believe, and practice, what I preach day in and day out. Time in the market, not timing the market, is how our clients will reach their goals.
 
 

Spaceman Spiff's picture
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Joined: 2006-08-08

Sorry, my point was that if you have a fee based model, like the one upcoming at Jones,  you don't have to worry about whether or not you can make a switch.  You just do it.
 
I'm not going to recommend that my client switch fund families.  That would be dumb and make me look like I'm doing it ONLY for the commissions.  It is absolutely cheapest for him to stay where he is.  LA has always been a fine family and should rebound.  But like I said before, can I keep him around long enough to prove it.  I'd guess that if a broker from another firm called him today, he'd at least sit down with them to look at their proposal.
 
I'm not dissatisfied with the entire portfolio, just a couple of funds that have underperformed their peers.  The rest are doing just fine.  And ice - you are correct.  They've made some bets, actually left the dance early on some sectors, that have cost them some performance.  They've made no material changes to management style or cost.  Just did the wrong thing at the wrong time.     

Broker24's picture
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Joined: 2006-10-12

Borker Boy wrote:
I love all of the cozy rhetoric about how CSE and relationships are what keep clients around, but I have to call BS on that. People invest money to make money. Period. End of story. I don't have a single client who brought me their money because they wanted a new friend who would give them a phone call every few months.
 
 
Borker, providing good service and ongoing contact prevents clients from talking to other brokers.
 
Example: let's assume we are all average to good advisors.  I have a client with 250K.  She has made above average returns.  I never call her.  Her account is down 3% right now, when the rest of the market is down 12%.  She thinks she is losing money hand over fist, because she doesn't pay attention to the market, only to the value of her account.  Since I never call her, she assumes I am ignoring her because I am losing her money.  Now, she meets a nice gentleman at church that is an advisor.  He talks to her..."oooooh, you're LOSING money?  Well, what is your BROKER advising you to do?  NOTHING?  Oh my word, we SHOULD talk."  Boom, you just lost that account to some schmuck from Primerica because of lack of service.  Unless you are seriously underperforming, returns are not why you lose clients.  Service is not just about answering the phone and sending birthday cards.  It's strategic.  You have to get between your clients and other advisors.  None of us outperforms wildly over long periods of time, so eventually our day comes when we have to cash in our "good service" chips, so to speak.

newnew's picture
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Joined: 2007-02-23

After 2 years I have no problem selling off A shares and going to fees with an all ETF or No-load index stategy. This is because the costs moving forward, while slightly more, are worth it. Why? Because we no longer have to worry about breakpoints, I can truly diversify (sorry, AF are all very similar),  and I am now paid on OLD money not just on NEW money coming in. This really focuses me on services them rather than chasing new money. Also removes product conflict of interest.
 
The following Borker quote is telling:
"The car analogy is one of my favorites, but I use it to convince people that paying me a load is the best thing for them to do. (I'm not personally convinced of that, but I'm in a tough spot since it's impossible to put food on the table while working for free.) "
 
I only do what I am personally convinced of, which is that commissions are not in the best interest of my clients. Therefore I sell the Ashares (we can stop paying the huge marketing costs of the active managers).
 
As for new clients, I say "no cost going in, no cost going out, I prove my worth to you over time (fees) or you can leave anytime". After hearing that, what client wants to pay Jones 3.5-5.75% upfront? Very few.

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