What to tell clients when transitioning to fee-only

For some time, banks and credit unions have been urging customers to change their business from transactional to fee-based.

Those who have resisted have a variety of reasons supporting their status quo position. However, at this point, conversion appears to be almost mandatory.

Fortunately, the path to change might be easier than ever.

So why do many advisory businesses remain stuck in a transactional format?

Many would say, “It's the way I have always done things. My clients like it and so do I, so why mess up a good thing?”

Others love the instant gratification of completing a transaction, seeing it on the next day’s run and getting paid that month.

But here is the biggest concern that most holdouts harbor: “If I convert to fee-based, my income will drop for an extended period of time.”

Please understand that it doesn't have to be that way.

Most advisers have a substantial portion of client assets, and thus revenue, associated with retirement accounts. And the Department of Labor's new fiduciary rule will have a major impact on our business.

Research firm Cerulli Associates says that “firms will avoid [individual retirement account] solutions if the advice provided receives compensation that the DoL considers potentially influenced by conflict of interest such as commissions and revenue sharing.”

Bing Waldert, managing director for U.S. research at Cerulli Associates, said in a statement, that broker-dealers with large advisory forces were adapting their business away from commission and proprietary products to fee-based fiduciary models.

So what does all this mean for advisers’ retirement accounts?

Will advisers be required to charge fees rather than commissions for all their retirement accounts? There is an alternative, albeit cumbersome, called the best interest contract exemption.

The BIC would be required for all non-fee based retirement accounts. This is a contract between retirement investors, advisers and their firms.

It must contain the following: an acknowledgement of fiduciary duty to the investor; a disclosure of all compensation and fees; a warranty that neither the adviser or firm will make any misleading statements about fees, assets or conflicts of interest; and that steps will be taken by advisers and firms to mitigate potential conflicts of interest. Frankly, the only people likely to be comfortable with the BIC are the DoL and plaintiff attorneys.

The pending DoL fiduciary rule offers an excellent reason for advisers to begin to convert their books now. Advisers can simply tell clients that the new DoL rule is the catalyst for change.

Consider the profound impact that this will have on adviser-client relationships.

Most of the rhetoric heard over the years about fee-based relationships is actually true. Because advisers are charging an annual fee and not selling a product, clients tend to be less defensive and more trusting.

This leads to deeper client relationships, access to more of their assets and a greater possibility of referrals. What previously were best described as customers through conversion become “real clients.”

As advisers convert, their clients’ view of them transcends from salesperson to trusted adviser. In that sense, clients very much prefer fees over commissions.

So clients prefer fees, the DoL is pushing that way and firms will soon be on board.

That said, advisers need a conversion strategy.

Consider an $80 million book that generates $500,000 and has zero fee-based business.

If a third of the book is retirement assets and those assets are converted to fee-based at on average charge of 1%, then that book would generate $20,000 in monthly fees. That equals about half its monthly average.

That sounds great, but how do advisers get there?

Identify a small group of fee-based products and services that are best-of-breed and will provide smart solutions for most clients. Become an expert on these offerings.

By sticking to this core group, an adviser’s expertise and confidence will shine through. Then make a commitment to meet, in person, with all of retirement account holders by the end of the year.

Advisers should let them know that the government is changing the rules of engagement for their retirement assets and then present their winning solution. It will be a lot of work, but most investors won’t resist.

With this plan in place, the business conversion is off and running.

Once advisers get comfortable with the process and those monthly fees continue to expand, they will likely find themselves offering fee-based solutions to all types of accounts. As the fees grow, so does the stability of the business.

Clients will be more positively engaged and relationships with them will deepen. The quality and value of business will soar.

This story is part of a 30-30 series on transitions. It was originally published on March 7.