The superiority of the fee-based compensation model

When I began in the financial services industry, I worked for a national firm and my job was to push financial products. Go out and find someone with money and sell them a mutual fund, a variable annuity or life insurance.

This model is riddled with conflicts of interest, such as selling a product that may be deemed “suitable,” but is not, strictly speaking, in the client’s best interests. But the preeminent conflict of the commission-based model is that it forces you to put the pursuit of new clients ahead of serving your existing ones.

One of my favorite aspects of the fee-based advice model is that our foremost job is service. Finding new clients is great — as I consistently remind readers in these columns — but only if your existing clients are taken care of. After all, it’s your existing clients that provide dependable revenue.

In the early weeks of the Covid chaos, when the financial markets were falling every day, our No. 1 focus was to ensure that none of our clients gave up on their financial plan and went to cash. In fact, so uncertain was the economic outcome that we went through a weeks-long period where we put a hold on accepting new clients and instead put 100% of our efforts into managing our existing base.

Clearly, we had both a moral duty and a fiduciary responsibility to guide our clients through that uncertain time. But how would we have proceeded if our business model were built upon selling new products? We may have had the best of intentions to assuage the fears of our clients, but if our revenues were predicated upon the sale of new products, we would have spent considerable effort finding and selling to fresh faces.

As a firm, we achieve a 98%-plus rate of client retention, in part, by close communication with our clients, monitoring any trends in client attrition or withdrawal rates, and by consistently surveying our clients for feedback on how we can improve.

Throughout the fourth quarter of every year, we spend considerable time building out a business plan for the following year. As a firm dedicated to expanding into new markets, of course we have marketing and business development plans, but our primary goal remains to serve our existing base.

A good friend of mine has been grinding it out in the mortgage industry for as long as I have been an advisor. Once he lands a customer and sells them a mortgage, he earns a commission and is on to the next.

The commission-only model is one in which they need to find new customers every week, otherwise they will have no revenue and will soon be out of business. Those of us who are fee-based and earn our revenues from serving, rather than selling, are in a position where our economic interests are aligned with those of our clients. That means that the better they do, the better we do. And after 30-plus years, I would not have it any other way.

Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $15 billion in AUM.