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The Business Benefits Of Transitioning From Commissions To Fee-Based Advisory Accounts

The Business Benefits Of Transitioning From Commissions To Fee-Based Advisory Accounts

Transitioning to fee-based advisory accounts is not easy.

Since the late 1990s, the broker-dealer community has been increasingly transitioning away from traditional commission-based accounts, and towards fee-based alternatives instead. Facilitated first by a proposed 1999 exemption under Rule 202 that would allow broker-dealers to offer fee-based accounts without being registered as investment advisers, and then transitioning fully to dual-registered or hybrid RIA arrangements (after the proposal was struck down in 2007), the shift has been substantial, with leading broker-dealers going from less than 10% of fee-based revenue to more than 50% today.

For any individual advisor, though, the reason to transition to doing fee-based advisory accounts isn’t just because the broker-dealer prefers it, but simply because it allows for building a bigger and more successful advisory business. The reason is rather straightforward: because commission-based business is transactional, and will always be constrained by the number of clients the advisor can personally see and sell, while a recurring revenue advisory business makes it possible to separate “selling” clients from the less-expensive process of servicing them. Or stated another way: after several years of commission-based business, your income on January 1st of a new year is still $0 until you get a new client, while with an advisory business, after a few years you can be financially successful with no new clients, as long as you give quality service to the ones you already have.

The challenge, though, is that transitioning to fee-based advisory accounts is not easy. As an advisor, it’s necessary to redefine your value proposition to justify charging an ongoing advisory fee, and persuade clients to make the change with you. And those reinvestments into the business have to happen just as revenue declines in the transition – because even if advisory fees may be more stable in the long run, in the near term it’s just less money coming in the door.

Nonetheless, with the regulatory winds around the globe blowing increasingly towards no-commission fiduciary advice, arguably the transition to fee-based advisory accounts may be inevitable anyway. But given that recurring revenue advisory fees are facilitating the growth of bigger advisory businesses, which also get better valuations in the marketplace, it’s a good shift to make, regardless of whether the regulators ultimately require it or not!

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