Fee based vs. Transaction based?

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Jan 29, 2007 4:41 pm

I am a new FA working at a firm where I start from scratch every month. After reading on this board about about advisors using a fee based platform or receiving payouts for ongoing AUM, it has made me wonder: All things equal, can advisors using my platform have as much success in terms building a business and knowing a steady income will be there next year? I mean, there are several big producers at my firm who average roughly the same production each year, but I am not sure how. Does it require constantly finding new clients? I would like to build up my practice to the point of having several hundred quality clients and then being able to scale back my marketing efforts, etc. and know with reasonable certainty that the next year will provide an income similar to the previous year. Will that be more difficult to do at a firm like mine?

Jan 29, 2007 4:59 pm

Yes, it will be significantly more difficult to have what you want running a transaction based business.  Yes, you will get revenue from your base assets once you build them up but not enough to stop running on the tread mill of opening new accounts.  This doesn't mean a transaction based biz is bad, just different.  Both ways can create wonderful life-styles.   I left a transaction based business after 5 years to shift to fee based.  I am now 75% fee based and much happier.  Less stress, better service for my clients.    

Jan 29, 2007 5:00 pm

YES!!!

Jan 29, 2007 5:06 pm

if you define several hundred as 300-400, that is probably 200-300 too many. yes it will be harder, but not until you get to about 300 gsc.

Jan 29, 2007 6:18 pm

I am 86% fee based and have fewer than 200 clients.  It is much
less stress than being transaction based for me.  I know there are
many fine advisors on this board that do well in the transaction
world.  I just noticed that when I started at Merrill ten years
ago that all the million dollar produces were fee based so I figured
that was the way to do it.


Jan 29, 2007 9:32 pm

I do quite a bit of fee-based business (wrap accounts, C shares, etc).  So obviously I'm not against it.


That being said, fee-based business can also be a curse when it comes to your practice.  It's easy to get comfortable when you know (in reality) that you have a good month (or year) just by walking in the door.  Sometimes clients' aren't contacted as often as there is no immediate production that will transact.  Yes, you want to keep these people happy.  Still, it happens.


What I've tried to do in annuitizing my business without getting complacent is to set very specific daily/monthly/yearly goals, and to keep myself accountable.  If I'm continually adding to my fee-based business, I know I'm not resting on my laurels.  Look at BondGuy, who apparently does quite a bit of transactional muni business.  I guarantee you that one of the main reasons he has continued to grow/prosper is because he is constantly "beating the bushes" with prospects and clients to get business done NOW. 

Jan 30, 2007 8:48 am
avernas:

I am a new FA working at a firm where I start from scratch every month. After reading on this board about about advisors using a fee based platform or receiving payouts for ongoing AUM, it has made me wonder: All things equal, can advisors using my platform have as much success in terms building a business and knowing a steady income will be there next year? I mean, there are several big producers at my firm who average roughly the same production each year, but I am not sure how. Does it require constantly finding new clients? I would like to build up my practice to the point of having several hundred quality clients and then being able to scale back my marketing efforts, etc. and know with reasonable certainty that the next year will provide an income similar to the previous year. Will that be more difficult to do at a firm like mine?


My firm is also transaction based, and I've had the same questions. I don't understand how an FA can stop taking new clients and continually gross $500k every year. At what point do your existing clients run out of money for you to invest and thus generate a commission? I've asked several vets about this, and none has been able to give me an answer that satisfies me.


I refuse to move money from one investment to another just to generate a commission, and if that's what goes on, I won't be around too long.

Jan 30, 2007 9:46 am

Borker what happens is that clients refer new clients.  They retire and do rollovers, they sell homes, they buy life insurance and LTC insurance  The consolidate money with you.  ETC ETC.  So once you get 50 million or so you do get some momentum and you of course get some from MFD trails but from what I know from transaction based friends who have all been around more than 12 years, the tread mill of opening new accounts NEVER stops.


For me that sounded like hell on earth so I moved from EDJ six years ago.  I now manage most everything myself on a discretionary basis.  I cant tell you what a difference in my life this change has ment.  Everything about it has been positive for me and my clients and my family.  I feel sorry for those who have 1500, 2000+ accounts and still are opening more.  I feel doubly sorry for their clients.  I have around 200 households and that's it. 


I highly recommend the shift to fee based to anyone.  This is the main reason I left EDJ and man was that a great decision.  

Jan 30, 2007 10:48 am

If you're doing transactional, try laddering munis or CD's and stagger the clients in this program.  That way, every month you have people coming up for new fixed income investments.

Jan 30, 2007 11:26 am

Does the treadmill stop for a fee based advisor?  What I mean is, let's say you brought in $250K in fees in 2006.  Now you're looking at 2007 and asking, what now?  How do I get to $300K?  Does a fee based advisor simply continue to manage the money he has now and just let the market take care of the increase?  Are you really that good a money manager to consistently grow your existing assets 20 or 30%  a year?  What happened to your income 2000 - 2002? 


My assumption would be that if you really want to grow your fee based paycheck you constantly have to be bringing in new clients, just like a transaction based broker.  


I don't think the service issues are any different for a fee based advisor than a transactional based advisor.  You still have to call your clients frequently, monitor their portfolios, ask for referrals, etc.  I think that's going to be the key whichever compensation method you use.  Great service = referrals = new clients = new biz.



Jan 30, 2007 11:26 am

I have said it several times in the past. The KEY is to have a healthy mix of fee-based as well as transactional business.


Depending on the composition of your book, it is ideal to have say 75% of your gross coming from fees/ trails, while the remainder is generated through transactions (ex.- closed end funds, tactical plays, ETF sector bets, etc). Keeps you from getting complacent in an all- fee book like The Judge alluded to above...

Jan 30, 2007 12:06 pm

Currently I have 175 fee based clients who have about $12M with me.  Average account balance is around $70k.


Two years from now i'm hoping those numbers are around 300 feebased clients with 30M making the avg acct. balance 100k.


To do this I will have to focus on bringing in additional assets from existing clients. 


Being in a bank program it's going to take more time to raise the average account balance.  One of the tradeoffs I guess.


scrim

Jan 30, 2007 1:29 pm

Scrim,


 They gave you over 5 years to get 30 million AUM? My impression after interviewing with companies is that they would want to see that much sooner.


Would 20-30 AUM be average at a company like RJF? 


I know each branch has it's own policies but at RJF the trails are a measily .25 for anything under 150k production, but over that it is much more So I am assuming they would like to see 20-30 AUM asap? Would they actually give someone over 5 years to attain this? For some reason the way everyone talks on here is that there is a slim chance of them giving you 5 years to get 20-30 mil AUM. I am just trying to get an idea here. Thanks


Jan 30, 2007 1:37 pm

I was just referring to the fee based part of my practice.   My overall AUM in 2.5 years is 20M starting from almost zero.


So the 30M total AUM should come in another 12-18months I project.


As far as other firms are concerned I'm really not qualified to answer that inquiry.


Good Luck.


scrim

Jan 30, 2007 2:21 pm
entrylevelFA:

If you're doing transactional, try laddering munis or CD's and stagger the clients in this program.  That way, every month you have people coming up for new fixed income investments.



No offense, but you obviously haven't been in this business very long.  Do you even know what a brokered CD pays?  You would need multiple hundred's of millions in AUM to even have a decent annual paycheck.


Muni's, or bonds in general, maybe...but again, the volume has to be there.  CD's...forget it.

Jan 30, 2007 2:27 pm

Bank - I was thinking the same thing. I'm sure he would have figured that out very soon after coming up with the great idea