Benefits of fee based vs. commission based
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Okay, my question came across incorrectly. What I should have asked originally is: What do you, as brokers, find are the major advantages for clients to move to fee-based versus commission based? What are the disadvantages?
Your co-worker?
As for making the move, believe it or not the clients get a vote. And, the biggest reason for them to make the move is because it's in their best interest to do so. Not because the advisor is tired of the monthly slog up commission mountain.
Tell your co-worker that the first step to converting to a fee busines is to become an expert on money managers, market history, and asset allocation. Also, included should be an asset protection system written into policy that by design gets clients off the tracks before the Black Swan Express runs them down. Once your co-worker has this basic knowledge under belt there will enough value to justify charging a fee. A simple letter offering to meet will get the ball rolling.
Short of that- stick with C shares.
[quote=iloveassets]
I am his brokers assistant...I am really not the "co-worker." And yes, it is 100% up to them--we realize that.
It would absolutely have to be in the best interest of the client for us to make the move. However, I am looking for tips on what people say to tip the scales in the fee based direction. That is an oxy moron like jumbo shrimp.. "it has to be in the best interest of the client, but how can I deceive them to make them believe it" What are the advantages the brokers find out there? What should we include in the letter? For the majority of his clients, it would be a no brainer as they would be serviced more appropriately.
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Second your letter so far is idiotic.. Third sending a letter to a client to tell them a fee account is better for them is even dumber..
Assuming you aren't just making the change to get off the commission battle (AND THAT IS A HUGE IF, BECAUSE IT SOUNDS LIKE YOU GUYS ARE JUST TRYING TO SLAM EVERYONE IN FEE).
1. Product vs Service
2. Removing some of the conflicts of interest
3. More availability of money managers, freedom, etc..
You should be selling fee based on the
"lower ticket charges" this is the dumbest comment i have ever read
"more active analysis" WTF were you doing before?
"you benefit, i benefit" Terrible, people are going to assume you will be more aggressive with their money because you stand to get paid more
"access to top money managers in world" let's not be dumb here. You are gaining access to the top money managers in the world, they are gaining access to the money managers your firm has selected based on (returns, deviation from index, $$$$$$ and $$$$$$)..
I'd not send a letter. I schedule an annual review and tighten up your presentation for going fee based.
Exactly - Superman! Why would anyone send out a bulk form letter to all their clients "recommending" they approve the new service fee schedule? Good grief iloveassets, tell me the zip code most of your clients reside in.
Bondguy,
We don't just sell C shares. We do A's or C's depending upon what is in the best interest of the client.
Squash,
That was the feedback I was looking for. Obviously, I was not going to phrase the letter with that verbiage. However, I was interested to hear the benefits and drawbacks (although my question was poorly phrased). I shouldn't have said anything about client transition at all. I am interested to hear if it typically is less costly to the client because that is one of the arguments I have heard. I want to know if anyone attempted to make the transition, made it, why and how you approached it?
Superman,
We were planning on doing a letter first and then following up to discuss the pros/cons and then obviously letting the client decide. It sounds like you feel a meeting is better initially.
I've been in the business for 6 months now. I did not ask the appropriate question and deservedly, I got burned for it. The bottom line is, we are going to give clients the option to do this if it is in their best interest. What are the pros and cons?
First of all it won't be less costly for the client unless they trade a lot(although you said they would still be charged for that(wondering where you work now))
Second don't send a letter.. You send a letter for products..
Third, you should define your own reasons. Flexibility, Independence, are reasons; cheaper, lies, and more income for you are bad reasons.
Iloveassets, it's considered bad form to use the edit button to completely change a standing post. It ruins the continuity of the the thread. More so when it's a post that starts a thread.
That said, your original post sounded like you could care less what the clients think, and just want off the commission gerbil wheel.
To go to fee is no different than charging commission in that there must be something of value offered. If you are offering off the rack managers on a cookie cutter platform you aren't going to be worth the fee regardless of how little you charge. To do so is just slinging managers to book the fee. It's a huge client disservice. That's why I posted that before you do this, first comes education. Once you and your SO become experts and actually have advice worth paying for, start with a general letter to the book offering the new service. A calling campaign to book review appointments is the nxt step. The appointments are a review to see if there is a fit. At this point the client is offered a choice. The go/no-go is the client's decision to make.
About the C shares: nothing wrong with C shares. In fact many clients would be better off in C's than in the fee programs offered by most of the majors. Most of those programs, that over promise and under deliver, are being slung by FAs who are only looking to book the fee and move on. Do the book a favor and don't join them.
The reason to go fee based, is to run a more efficient operation, for the benefit of the client, and yourself.
If you have a discretionary fee based account, during terribly volatile times of the market, someone is in control of the account and can make some strategic moves. A "good" manager, would be able then, to sell regardless of greed, and buy regardless of fear.
This is a good time to discuss going to a fee based relationship, because the client is somewhere between greed and fear, and the accounts are in reasonably good shape right now.
I'm debating this same issue now, as I'm strictly transactional. I'm tired of losing buying opportunities when they present themselves, and conversely, I hate trying to pry assets away from clients when I think it's time to sell. Some of my clients are fine, they return calls and meet with me at my request, but unfortunately, many clients get caught up in other matters, and trying to get them to pay attention is difficult.
I agree with others, that this proposition should not be done by mail. No, it should be done by a meeting, and you should start with clients that really need this, and will probably agree with you. You learn from them, and move towards your tougher cookies later. I'd be very thorough in setting up the meeting, have a written agenda, and have the ppwk completed and ready to go when they show up.
Later, when you have a fee based book, it is your responsibility to continue meeting the client, reviewing their holdings etc. Unfortunately, our industry too often has turned fee based business, into auto pilot biz. Regulators don't like that, and your customer will after a few years realize what you did...
Bondguy,
I changed my post because I came off completely misperceived and I wanted to post something that reflected what I was getting at more appropriately. It may have come off that way and our way of doing business is completely different than that. Always client first. I don't consider it bad form at all.
BFP,
Very well said. The broker is having the same conundrum you are.
More clarification for you:
When I originally said, "more active analysis," I meant it. My understanding is that when you move clients to fee based, you are required to do a bi-annual check-up on their account. This broker is older and has clients he has had for 40 years...many of which with the same blue chips he bought for them 20 years ago. Accounts under $100k aren't necessarily seeing the service the $1MM clients are. If they are in good, quality holdings, fine. If not, they deserve service too.
"You benefit, I benefit." Let me clarify. I think there is something to be said for incentive based performance. It certainly doesn't mean you are going to put someone into riskier securities. Again, goes back to service. Let's assume you are going to do the best job you can for a client. Great. However, would you agree that if you have a vested performance-based interest you are going to work hard to help them succeed versus putting them in a stock for 10 years...a lot can change over that period. Yes, you should move them but having them incur another commission charge is tough for both the broker and the client to swallow. It wasn't the best way to say it but I hope it comes across here.
As far as money managers go, as much as we would love to be omniscient, having access to experienced money managers outside of the firm and outside of A and C shares is nice, too.
fee based puts you on the same side of the table with the client imo. You perform you get paid better if you don’t you get paid less. Also tell them fee based clients never have to worry about the motivation of the broker when they get a call on a trade at the end of the month. Not calling commission bad but this business is headed toward fee based advice quickly.
[quote=iloveassets]
Bondguy,
We don't just sell C shares. We do A's or C's depending upon what is in the best interest of the client.
Squash,
That was the feedback I was looking for. Obviously, I was not going to phrase the letter with that verbiage. However, I was interested to hear the benefits and drawbacks (although my question was poorly phrased). I shouldn't have said anything about client transition at all. I am interested to hear if it typically is less costly to the client because that is one of the arguments I have heard. I want to know if anyone attempted to make the transition, made it, why and how you approached it?
Superman,
We were planning on doing a letter first and then following up to discuss the pros/cons and then obviously letting the client decide. It sounds like you feel a meeting is better initially.
I've been in the business for 6 months now. I did not ask the appropriate question and deservedly, I got burned for it. The bottom line is, we are going to give clients the option to do this if it is in their best interest. What are the pros and cons?
[/quote]
I'm not sure I understand all the flaming negativity here to an honest question, but perhaps I missed something. At any rate, I'll weigh in.
My plan is to eventually transition my entire practice to fee-based. I "manage" the assets by and large, rather than just farming it out to third party managers, but do believe in using actively managed funds and a few individual securities where appropriate. I've done the cost comparison for clients numerous times, comparing the C share equivalent to their institutional share fund in a fee based account at roughly 1-1.25%. Essentially, the fees are identical all-in with either of these plans.
What I would make clear to clients is that a fee-based arrangement removes any perceived conflict from you as their advisor in making adjustments to their account and allows you to rebalance their portfolio without incurring transaction costs. Rebalancing is a HIGHLY important component to a well diversified long-term portfolio. I always tell my clients and prospective clients that I don't want to be in a position where they might question my advice because they think I'm giving it to receive a commission. A fee-based account allows us to make changes when it's appropriate for THEM, not me.
Hope that helps.
I always tell my clients and prospective clients that I don't want to be in a position where they might question my advice because they think I'm giving it to receive a commission. A fee-based account allows us to make changes when it's appropriate for THEM, not me.
Hah, hah, look over here at my right hand while my left hand is robbing you blind. It IS a good story, though.
For a while, even the Japanese learned how to take the money by stealth. (Happy Pearl Harbor Day.) That's what always happens in this industry - if the regulators allow it, a lot of "fee only" businessess will be exposed for their weakness and bombed by competition.
Such a simple model, report to your state and hang up your shingle (under 100m). The next time this holier than thou fee only stampede will look bad will have something to do with market fluctuation. No conflict of interest between investment objectives and building assets in a bull gone bear -oh wait.
Let's all hurry to the next platform.
[quote=Nova02]
[quote=iloveassets]
Bondguy,
We don't just sell C shares. We do A's or C's depending upon what is in the best interest of the client.
Squash,
That was the feedback I was looking for. Obviously, I was not going to phrase the letter with that verbiage. However, I was interested to hear the benefits and drawbacks (although my question was poorly phrased). I shouldn't have said anything about client transition at all. I am interested to hear if it typically is less costly to the client because that is one of the arguments I have heard. I want to know if anyone attempted to make the transition, made it, why and how you approached it?
Superman,
We were planning on doing a letter first and then following up to discuss the pros/cons and then obviously letting the client decide. It sounds like you feel a meeting is better initially.
I've been in the business for 6 months now. I did not ask the appropriate question and deservedly, I got burned for it. The bottom line is, we are going to give clients the option to do this if it is in their best interest. What are the pros and cons?
[/quote]
I'm not sure I understand all the flaming negativity here to an honest question, but perhaps I missed something. At any rate, I'll weigh in.
My plan is to eventually transition my entire practice to fee-based. I "manage" the assets by and large, rather than just farming it out to third party managers, but do believe in using actively managed funds and a few individual securities where appropriate. I've done the cost comparison for clients numerous times, comparing the C share equivalent to their institutional share fund in a fee based account at roughly 1-1.25%. Essentially, the fees are identical all-in with either of these plans.
What I would make clear to clients is that a fee-based arrangement removes any perceived conflict from you as their advisor in making adjustments to their account and allows you to rebalance their portfolio without incurring transaction costs. Rebalancing is a HIGHLY important component to a well diversified long-term portfolio. I always tell my clients and prospective clients that I don't want to be in a position where they might question my advice because they think I'm giving it to receive a commission. A fee-based account allows us to make changes when it's appropriate for THEM, not me.
Hope that helps.
[/quote]
Here's the problem: fee vs commission is a payment solution that should be in the client's hands, not used as a business solution for advisors who no longer want to work month to month on straight commission. We are offering a service. At times there is a clear advantage for the client to pay for those services via a fee. At others, the clear cut choice is commission. Where the choice is less than clear it is up to us to present the options to the clients and let them chose.
As for the benefits of fee, being on the same side of the table, being able to re-balance when neeeded at no cost etc: My ROA for the transaction side of my book, which is about 90% of the book, is .67%. That's up a bit from last year. So, who's more on the same side of the table, me at .67% or you at 1.25%? Comparitively speaking, you are hosing your clients. So, though the same side of the table speech makes for a nice sales pitch, in reality, it's bullshit.
Next up is the cost free rebalancing. Ok, Mr Advisor, that sounds great!!!! Except there is this: it's not cost free!!! That 1.25% fee is the cost. And, that fee is charged on 100% of the assets, not just those assets that are getting rebalanced. On a million dollar account with 500k in equities, what are the chances that that entire 500k will need rebalancing in any one year? Even if they did, in a commission acct the cost would be less, every year! And, usually, only a small percentage of the securities in the portfolio will need to be touched in any one year. Especially true of fixed income accts and short duration accts.
And, then there's the problem with regulators. Why are you charging a fee on accts without activity? Instead of not being able to rebalance because of a perceived conflict, you are forced to rebalance to keep the accts from ungoing scrutiny. Advisors are getting dinged for this on a regualr basis. So, during those reviews, better manufacture some reasons to sell enough of a chunk to keep the black hats at bay.
Taxes. There is less tax control in fee accts managed by outside managers. While fee accts do offer advantages over mutual funds with regard to taking gains/losses etc they are not as flexible as individually held investments. Really, do you want to be holding a stock your highly researched, hand picked manager has decided to dump in November because the gain is going to hurt your client? What's the point of paying this guy if you can't take his advice? Whew, tough one, and a no win for the client.
While there are many advantages to fee, clearly, there is another side of the street.
Finally, that the Wall Street firms are going to fee shouldn't be confused with anything having to do with client's best interest. That would be a first!!!!
And, then there's the problem with regulators. Why are you charging a fee on accts without activity? Instead of not being able to rebalance because of a perceived conflict, you are forced to rebalance to keep the accts from ungoing scrutiny. Advisors are getting dinged for this on a regualr basis. So, during those reviews, better manufacture some reasons to sell enough of a chunk to keep the black hats at bay.
It will be really interesting to see how this plays out. Right now, if you are a broker, you look at Broker Check and we all know how the authorities scrutinze. All you have to do with RIA is register with the state. I wonder what the ROI for smaller RIA will look like if there is a wave of consumer sentiment against the business practices of RIAs (going forward and looking back) - versus b/ds.
To be successful in transitioning to a fee base business, you had better not be a lazy advisor when it comes to communicating and contacting clients. Fee based business requires more contact, not less, if you are going to provide the value and be worth the 1 1/4% to 2 1/4%+ you charge on the clients' wealth you manage.
[quote=iloveassets]
Okay, my question came across incorrectly. What I should have asked originally is: What do you, as brokers, find are the major advantages for clients to move to fee-based versus commission based? What are the disadvantages?
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Not a complete list of course and from my experience and client conversations.
Advantage > 1. Client should be informed enough by the advisor to perceive lower or zero conflict of interest when hearing recommendations if it's not a discretionary account. 2. If it is a discretionary account, client should appreciate the access to a platform that includes top portfolio managers being matched with client risk profiles and preferences. 3. Quarterly reporting of porfolio's performance to a benchmark if done by the advisor helps to better explain relative performance.
Disadvantage > 1. Having and advisor that is unprepared or unskilled to be an engaged communicator and advisor to keep the client informed. 2. If not an actively managed portfolio the client could save money in a buy and hold strategy. 3. Scale is in favor of the larger investor. Must be a minimum of $300K and preferably $500K+ to be properly allocated.