Outside voices and views for advisers

Five tips to add fee-based advisory work

For commission-based advisers considering the addition of fee-based advisory services, it's important to prepare for the many activities that such a move entails

Aug 26, 2015 @ 4:45 pm

By Jeffrey Rosenthal

There's no question that choice and flexibility are the essential ingredients to success in operating an independent financial advisory practice, particularly when it comes to being able to offer the widest possible array of investment solutions and financial products to the client.

Despite all of the recent noise around the Labor Department's definition of the fiduciary standard, commission-based services will continue to be a major part of the industry. Many financial products that investors want and need — from certain mutual funds and exchange-traded funds, to insurance and variable annuities to alternative assets — may be more suitable in a brokerage versus a fee-based context.

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That said, it's also easy to understand the growing popularity of adopting a fee-based advisory structure for independent advisers who have worked primarily on a commission basis: By being able to combine both a fee-based option with a commission-based model, an adviser can provide a flexible client service offering that can incorporate the best of both worlds.


For commission-based advisers considering the addition of fee-based advisory services, it's important to prepare for the many activities that such a move entails. It doesn't happen overnight, nor with the flip of a switch.

The transition to add fee-based advice to one's practice normally takes 12 to 18 months. In order to accomplish a smooth and successful transition, here are some suggestions to prepare:

• Evaluate your book of business. The process should kick off with an objective assessment of your practice. Since every adviser's business is different, it is imperative to ascertain which of your clients, and what portion of their business, might benefit from making the switch. Not every client will be best served by a fee-based model and some may not want it.

Consider the nature of your client base, what your clients are seeking from the adviser relationship, and how the transition to fee-based advice might reshape a portfolio and improve its performance. For instance, are your clients strictly buy-and-hold investors? Do they mostly hold ETFs? Are there a lot of insurance products in their accounts? In cases where the account is not actively managed, perhaps an advisory fee does not make the most sense, but rather a planning or consulting fee would be more cost effective, with the investments done on a transactional basis.

• Educate yourself. There is a lot to learn before you begin to make this transition, and the process necessitates a serious amount of study regarding the many different regulatory requirements that go into being a fee-based adviser. The rules are different, the regulators are different and the expectations placed on the adviser are different, too.

Importantly, there is a lot of documentation to become familiar with, from the required ADV forms to the legal contract you will present to your clients, spelling out the terms of your new relationship.

• Come up with a business plan, and make provisions for somebody to "hold your feet to the fire" on that plan. Before you take any action, you should have a complete road map of all the things you will need to do to make the transition work, including additional resources, systems and even time commitments from you or your team. A clear, detailed and well-thought-out plan will be vital.

This can best be accomplished working closely with a conscientious broker-dealer. It will help you stay ontrack and accomplish all the objectives you have set out. All too often, advisers develop business plans that wind up being stuck in a drawer as he or she — quite rightly — continues to address the myriad concerns and issues that emerge in the daily course of business.

• Communicate with your clients. This will be the most crucial part of the migration, and it isn't always easy. Start with those clients with whom you have the best relationship, and with whom you have developed a longstanding, trusting partnership. They will be the most open to hearing what you have to say — and these are the clients you want to make sure you retain.

Walk each client through a frank discussion of how they could benefit from a fee-based advisory relationship and what the compensation arrangement would be. Consider their current portfolio and use the discussion as a good opportunity to evaluate progress toward their goals, or if changes are necessary to enhance their portfolios.

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Your client conversations may raise a number of troubling issues. Some clients may be surprised to learn that you have not already had a fiduciary relationship with them. There may also be clients with whom you have not sufficiently communicated over the years — for example, a retirement client for whom you set up an annuity that just operates automatically. These clients may feel they have been neglected, and so coming to them now may prove uncomfortable. But it is nevertheless a good opportunity to reestablish contact, refresh the relationship and explain the benefits of the new advisory arrangement.

• Communicate with your other stakeholders. The transition to a fee-based model may affect constituencies other than your clients, especially your younger associates, your assistants and the rest of your organization. Going from a completely transactional service model to a consultative one will not only affect the way in which they deliver services, but it may also directly affect their compensation. They may find that the services they render may no longer have an immediate influence on their earnings, but rather will have greater effect in the long term by deepening client relationships and making the firm more efficient and profitable overall.

Our industry continues to undergo many changes, but one reliable mainstay of our business is that the hybrid adviser who provides the widest array of investment solutions and services to clients tends to enjoy greater levels of success.

One of the welcome advantages that independent financial advisers enjoy is the great degree of freedom they have to make sure they align their business model to serve their clients' best interests.

Jeffrey Rosenthal is chief marketing officer of Triad Advisors Inc., an independent broker-dealers that is a wholly owned subsidiary of Ladenburg Thalmann Financial Services Inc.


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