Fee Advisor: Talking Poinnts?

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Feb 15, 2006 10:40 am

I'm in the process of getting my series 65 and will begin transitioning some of my clients to a fee or wrap program.  Also will be able to overcome the new Merrill Rule restrictions.


My questions are to you guys who are already there.  What talking points are you using to sell an existing client on fee based business? or How are you presenting the program to prospects?  How are you comparing the two methods of compensation:  commission vs fee based.    


This web site has an article http://registeredrep.com/mag/financesides/  that sort of goes over this conundrum.   I was discussing this with another agent and he has said that he finds that most people don't want to pay fees, would prefer to pay as they go with commissions.  But if they choose that method then we have our hands tied when the client wants to have more in depth financial advice than "buy this investment"


How are you guys handling this conundrum?

Feb 15, 2006 11:30 am

I have made that transition over the last 4-5 years or so to where about 45% of my business is now fees.


FWIW I have generally found that folks are pretty amenable to fees when you explain how it tends to eliminate conflict issues.


I tell people-"hey look we've known each other a while and I think I've proven to you that I have your best interests at heart.  That being said, the fact remains that I get paid when you move money, not for any of the other things I spend time doing things for you.  No matter how much I have my heart in the right place or carefully consider my reasons for a transaction that fact does not change.  Too, even if you would rather not admit it, I would bet that there has been at least one time in the last few years where you wondered if at least one of the transaction I've suggested was perhaps driven by revenues.  It's just human nature-both yours and mind.  Putting our relationship on a fee basis, wherever possible-separates the revenue/cost from the transaction, and allows both of us to focus solely at all times on whether or not the trade makes sense for you.  Making good investment decisions is tough enough without letting transaction costs and motivations cloud the picture.  Too, Mr. Client, I've found that clients often make better decisions in a fee platform because they're not worried about the cost of the transaction.  This is especially true when it comes to harvesting losses before things get too bad.  This area in particular is a weakness for many if not most individual investors.


Last but not least-sir-consider this hard fact.  If you compensate me on a fee basis, the ONLY way I get a raise if if the value of your account increases.  Too, to maintain my income, I have to work every day to make sure you're happy with my service and the progress you're making."  (folks love that last bit)



Hope that helps.



Feb 15, 2006 6:07 pm

Adding to Joe's good points, I've also found it helpful and effective to remind clients/prospects that while you're in the securities business, unlike many others in our business you view your practice as primarily one of providing service to your clients -- that certainly includes investment transactions when appropriate, but more importantly involves constant portfolio monitoring & reviews, performance reporting, asset allocation & rebalancing, addressing client needs, answering questions, handling account servicing issues, etc. 


To be able to provide this high level of service in the most objective manner there simply has to be the revenues to support your business (all business people readily understand this), and that comes from your advisory fees.  Without that revenue and relying just on commissions for each transaction, you either face the inherent potential conflicts Joe describes and/or you can't offer the highest quality of service your clients should expect.


Now, if you're not providing all these services to clients, you obviously can't use that tack.  But, I've seen reps who are transitioning to fees explain to their clients that they're changing how their practice will be structured to include a much higher level of service, and that usually takes care of that.


You may also point out that clients who don't feel a need for comprehensive service, always have the option to continue to pay you on a commission basis, but they should understand that fee-based clients will be receiving a higher level of service. 


While I haven't had a need to do it (but probably should), I have a contemporary who outlines all this in his marketing materials.  Essentially, he lists the services he provides to fee-based clients and those limited ones he provides to commission only clients.  He's outlining the relative value he delivers, and his prospects can make the price/value decision on how they'd like to engage him.  Sort of like the client can pay less to get basic food from a limited menu at a fast food place, get their own plastic utensils & paper napkins, and carry their food, or they can pay more and pay tips at a sit-down restaurant for better food, more choices, real silverware & napkins, and complete table service.  Just a simple price/value equation.


I know that all can sound harsh to some, but if a rep is committed to having a substantial fee-based practice they have to manage client expectations and help them to understand that you are running a business and are not just some run-of-the-mill stock jockey or insurance salesman.  Lawyers, accountants, and other service professionals are always paid for their services.  Clients understand that, and if we are delivering analogous professional services as it relates to our clients' financial lives, they usually don't have issues with a fee-based approach.

Feb 15, 2006 6:26 pm
Duke#1:

Adding to Joe's good points, I've also found it helpful and effective to remind clients/prospects that while you're in the securities business, unlike many others in our business you view your practice as primarily one of providing service to your clients -- that certainly includes investment transactions when appropriate, but more importantly involves constant portfolio monitoring & reviews, performance reporting, asset allocation & rebalancing, addressing client needs, answering questions, handling account servicing issues, etc. 


To be able to provide this high level of service in the most objective manner there simply has to be the revenues to support your business (all business people readily understand this), and that comes from your advisory fees.  Without that revenue and relying just on commissions for each transaction, you either face the inherent potential conflicts Joe describes and/or you can't offer the highest quality of service your clients should expect.


Now, if you're not providing all these services to clients, you obviously can't use that tack.  But, I've seen reps who are transitioning to fees explain to their clients that they're changing how their practice will be structured to include a much higher level of service, and that usually takes care of that.


You may also point out that clients who don't feel a need for comprehensive service, always have the option to continue to pay you on a commission basis, but they should understand that fee-based clients will be receiving a higher level of service. 


While I haven't had a need to do it (but probably should), I have a contemporary who outlines all this in his marketing materials.  Essentially, he lists the services he provides to fee-based clients and those limited ones he provides to commission only clients.  He's outlining the relative value he delivers, and his prospects can make the price/value decision on how they'd like to engage him.  Sort of like the client can pay less to get basic food from a limited menu at a fast food place, get their own plastic utensils & paper napkins, and carry their food, or they can pay more and pay tips at a sit-down restaurant for better food, more choices, real silverware & napkins, and complete table service.  Just a simple price/value equation.


I know that all can sound harsh to some, but if a rep is committed to having a substantial fee-based practice they have to manage client expectations and help them to understand that you are running a business and are not just some run-of-the-mill stock jockey or insurance salesman.  Lawyers, accountants, and other service professionals are always paid for their services.  Clients understand that, and if we are delivering analogous professional services as it relates to our clients' financial lives, they usually don't have issues with a fee-based approach.



Good stuff dude.  Like I said I haven't found many folks have a problem with fee-based.

Feb 15, 2006 6:43 pm

This is good stuff.  Thanks for the talking points guys 


You may also point out that clients who don't feel a need for comprehensive service, always have the option to continue to pay you on a commission basis, but they should understand that fee-based clients will be receiving a higher level of service.


I like this and the menu of services idea. 

Feb 15, 2006 7:55 pm

People hate paying fees if they are not getting any service.  If they are getting good service they expect to pay fees.


Think of it like this:  Mr. Jones has $450,000 with you and pays you quarterky fees of $1250 (1% a year), what are you doing to eanr that $1250.  If you did nothing in 3 months your overpaid.  If you answered his questions, updated his goals, sold some stock, recommended some stuff for the kids, referred him to a lawyerand attened that meeting etc. your earning your keep.


I love when people ask me how I get paid.  I ask them how did you pay your last advisor:


Answer : We didn't


Response: Oh Really, you didn't pay dirk 1 penny


Answer: No


Response: Let me show you something

Feb 15, 2006 10:23 pm

Oh Really, you didn't pay dirk 1 penny


LOL


But seriously, what about those clients to whom you have already been providing mega service.  They are used to it for free... and now I want to charge.  (Just playing Devil's Advocate here). 


Feb 16, 2006 12:24 am

I have another question for those of you who have made the transition.  What do you do with your clients you have sold A share mutual funds to?  I don't think it would be a problem with older accounts, but if someone paid 3-4% a year ago and now I want them to pay a wrap fee, I would expect them to feel they were mislead into paying the upfront fee.


Concern about this has me not pushing some prospects as hard as I should because I would rather get them as clients after I leave EDJ, rather than bringing them in now by convincing them they should pay an upfront load so they don't have to keep paying an advisor 1% forever.


Thanks.

Feb 16, 2006 12:24 am

They weren't getting it for free then, Babs...they were just paying on a transaction basis.  Now, they are swapping commissions for fees.  Might it cost them more? Perhaps, but do you not ever deserve a raise?  Ask them if the price of gas, groceries, or whatever has been going down over the last few years.


Also, as your business expands, it is natural that you will have to prioritize your service levels, and if your clients still expect to be at the top of the food chain, they will need to migrate to the fee side.  As Joe said earlier, it's the client's choice, but they need to realize that to remain as a priority service customer going forward, they will have to pay a regular, continuous fee...not necessarily more money, but on the installment plan, rather than a larger lump sum here and there.  It's much akin to either paying $300/month gas bills in the winter and $10/month in the summer vs. paying $100/month year-round.


That's not nearly as eloquent as Joe & Duke's posts (from which I use many of the talking points already, and am more than happy to incorporate the rest going forward), but what do you expect when all the good stuff has already been said?!!

Feb 16, 2006 12:31 am
EDJ4now:

I have another question for those of you who have made the transition.  What do you do with your clients you have sold A share mutual funds to?  I don't think it would be a problem with older accounts, but if someone paid 3-4% a year ago and now I want them to pay a wrap fee, I would expect them to feel they were mislead into paying the upfront fee.

Concern about this has me not pushing some prospects as hard as I should because I would rather get them as clients after I leave EDJ, rather than bringing them in now by convincing them they should pay an upfront load so they don't have to keep paying an advisor 1% forever.


Thanks.


I'd be hesitant to transition an account that paid a front-end load last year into a fee-based arrangement this year for the reasons you mentioned.  I would start with stale accounts that are due for a change and then transition the newer accounts when you get to a point that you think a change is warranted in those accounts.  That is a great time to offer them the choice to pay another load, or go to a fee-based program.

Feb 16, 2006 12:51 am

Can anyone point me to an up to date link with some precise information on the new 'Merril Rule'?

Feb 16, 2006 10:46 am
Indyone:

They weren't getting it for free then, Babs...they were just paying on a transaction basis.  Now, they are swapping commissions for fees.  Might it cost them more? Perhaps, but do you not ever deserve a raise?  Ask them if the price of gas, groceries, or whatever has been going down over the last few years.


Also, as your business expands, it is natural that you will have to prioritize your service levels, and if your clients still expect to be at the top of the food chain, they will need to migrate to the fee side.  As Joe said earlier, it's the client's choice, but they need to realize that to remain as a priority service customer going forward, they will have to pay a regular, continuous fee...not necessarily more money, but on the installment plan, rather than a larger lump sum here and there.  It's much akin to either paying $300/month gas bills in the winter and $10/month in the summer vs. paying $100/month year-round.


That's not nearly as eloquent as Joe & Duke's posts (from which I use many of the talking points already, and am more than happy to incorporate the rest going forward), but what do you expect when all the good stuff has already been said?!!



Another good post.  This thread is really valuable.  What about EJJ4now's question.  Is it concievable to have two accounts with a client. One to hold the A shares that were sold when there was not a fee based option and then open another for the fee based side?  At some point the accounts could be consolidated.


More noob (to the fee side) questions. Could you convert the A shares previously sold to advisor shares? Would there be a benefit in this to the client?


Feb 16, 2006 12:53 pm
babbling looney:

Another good post.  This thread is really valuable.  What about EJJ4now's question.  Is it concievable to have two accounts with a client. One to hold the A shares that were sold when there was not a fee based option and then open another for the fee based side?  At some point the accounts could be consolidated.

More noob (to the fee side) questions. Could you convert the A shares previously sold to advisor shares? Would there be a benefit in this to the client?


First question:  Yes, it absolutely is conceivable to have both a brokerage and a fee-based account at the same time.  I have this exact scenario on an IRA client, while I wait for the CDSC to disappear on some old B shares I sold him years back.  The balance of his account is in the fee-based program and the way it is performing, he will be glad to consolidate when the B shares convert to A.


Question two:  I don't convert A shares to advisor class unless the expense ratio is lower and you don't create a nasty taxable event in the process.  My experience is that A shares are fine in a fee-based arrangement, although if you never change anything, your clients may start to wonder what they're paying for.  LPL (and I'm sure others) actually flag inactive fee-based accounts for review.  My assumption, since I've not had any flagged yet, is that I would have to defend any inactivity, or put the flagged accounts back onto the commission side.


Anothr random thought...if someone balks at a 1% (or whatever reasonable rate you decide to charge) fee-based arrangement, you may want to consider moving them out and let the cheapskate(s) be someone else's headache...unless they are a good commission-based account.  You will probably never be all fee-based, but my goal is 85% over the next five years (I'm about 50/50 now).


I agree on the thread...much more valuable to me than the political discussions...

Feb 16, 2006 3:45 pm

Since I'm a relative newbie I started in my program a bit over a year ago with pretty much a blank slate.


During my training I researched the different ways to build a practice from scratch.


I felt a fee based approach was best.


Even though I've had to sacrifice some upfront pay I feel this arrangement will work best for my clients, my firm and me in the long run.


Approx 85% of my production is from fee based accounts.


I have had no clients complain about this arrangement yet.


I have about 8M fee based assets after a little over a year.


scrim


Feb 16, 2006 5:17 pm

Re the question of how we handle A shares bought outside of a fee account -- my b/d lets us hold those in the fee account as "non-billable assets".  That way the client (& rep) get the advantage of having everything together in one account for performance reporting, asset allocation reports, etc. purposes.  Makes it much simpler for everyone rather than having a second account holding the A's.


Those non-billable assets are subject to our admin fee (a maximum of only 9 bps depending on account size) since the client is getting detailed performance reporting, etc.  The non-billable assets count in determining the fee breakpoint levels, so the client gets a little break there.  After two years the A shares can be moved over to be billable assets if the rep wants to (i.e., a rep has the discretion to delay longer than two years if he/she feels that's more equitable for the client factoring in the size of initial commission).


Other load fund classes (e.g., B's) can also be held in the accounts as non-billable assets until they convert to A's and then they're subject to the fee.