Commission to Fee Only

How do I make this right now to her in my billing?

I agree. 

So if I understand correctly…when you converting commission based clients to fee only…you charge only on new money?  The brokerage firm I was with had some kind of formula for converting commission clients to the advisory side of the business…I believe they billed the current advisory rate…and then credited commissions paid by the client until the client used up the commissions.

[quote=intrigued]I have gone from a broker based practice to a fee only independent practice.

[/quote]
I think you need to clarify what precisely you mean by an “independent fee only practice.”  People often times use this term very loosely.

Are you an RIA?  A rep with an independent B/D?

So if I understand correctly…when you converting commission based clients to fee only…you charge only on new money?  The brokerage firm I was with had some kind of formula for converting commission clients to the advisory side of the business…I believe they billed the current advisory rate…and then credited commissions paid by the client until the client used up the commissions.

if you charge your fee on top top of index funds or ETFs, then they are NOT paying more (after you figure in the trading costs AND the expense ratio/12b1s of those actrively managed funds). The loads were ON TOP of all that–so moving forward as of today the costs aren’t much different either way. And even if they are slightly more now with the fee, it is worth it to not have all your money with one fund family just to hit a stupid breakpoint.

your idea to credit them for commissions paid sounds very fair to me. 

[quote=anonymous]

How do I make this right now to her in my billing?

 You seem to be missing the part where he said, "I have one client that invested with me right before I converted."  He knew that he was making the switch.  Therefore, he should either have not taken her on as a client or he shouldn't be charging her a fee for that portion of the money.

Yes, he made a mistake, but he obviously can't go back in time and change it.  If he clearly explains the pros and cons of fees, and gives her an equivalent number of years free then allows her to make the choice to stay or leave then I think he has made up for his sins.   

[quote=Morphius]

[quote=intrigued]I have gone from a broker based practice to a fee only independent practice.

[/quote]
I think you need to clarify what precisely you mean by an “independent fee only practice.”  People often times use this term very loosely.

Are you an RIA?  A rep with an independent B/D?
[/quote]
Intrigued,

In addition to the advice you are getting here, you also need to recognize that there is a compliance element to whatever you wish to do with fee adjustments.  The particulars vary depending on your specific legal status as either an RIA or RR of a B/D, which is why I asked the question earlier.

Which is it?

The point is (and I do not know the actual timeline of this specific client) you cannot sell them A shares Monday and then Tuesday say you had a revelation last night and realized fee based is the way to go.  He likely knew he was going fee based when he made the original transaction, so “fixing it” now can be problematic.

I’m an independent RIA.

The situation was I was with a broker/dealer that I could do advisory business with at the time but the cost to the client would have ended up at about 2% vs 4% load. I chose what was best for the client at the time.  I left the broker/dealer because I found their fees on advisory business was ludicrous.

As for compliance the wording in my adv says up to x%…but I do have provisions in the wording for discounts.

Intrigued, I’ve always wandered why someone would go fee-only.  Simply from the insurance aspect, it seems like a mistake, since you can’t adequately help them in that area.  Do you tend to ignore insurance subjects or do you send them to somebody else or are you not fee only?

[quote=intrigued]I’m an independent RIA.

The situation was I was with a broker/dealer that I could do advisory business with at the time but the cost to the client would have ended up at about 2% vs 4% load. I chose what was best for the client at the time.  I left the broker/dealer because I found their fees on advisory business was ludicrous.

As for compliance the wording in my adv says up to x%…but I do have provisions in the wording for discounts. [/quote]
Keep in mind that simply calling something a discount does not necessarily make it so from a regulatory standpoint.  Depending on the specifics, it sounds to me like what you are describing might very well be considered by the SEC as a commission rebate or recapture, not a fee discount.  Does your ADV address either of those topics?

When Jones goes to the advisory account, will we be converting old A shares over?

I’m afraid that’s a detail they aren’t really going to let out of the bag until summer regionals.  I’ve heard rumors that they’ve addressed the issue, but no details.  The comment from the GP went something “if you have a client who paid you commissions recently, but would like to switch to fee based, you’d like to reimburse them for the commissions they already paid, wouldn’t you?”  Take that for what it’s worth.

[quote=Borker Boy]When Jones goes to the advisory account, will we be converting old A shares over?

I heard they must be at least 4 years into Ashares first before the “switch”.

[quote=iceco1d]Nope, not at my firm.  Anything that’s hit its 3 year anniversary.  It’s a brand new “strategic initiative.”  I haven’t a) done any transaction biz, b) been a rep for 3 years, so I c) don’t have to worry about it.  [/quote]

d) yet! 

[quote=anonymous]Intrigued, I’ve always wandered why someone would go fee-only.  Simply from the insurance aspect, it seems like a mistake, since you can’t adequately help them in that area.  Do you tend to ignore insurance subjects or do you send them to somebody else or are you not fee only?[/quote]

I refer insurance business to someone else. At a future time I may get my insurance licenses and change my adv, but for the present time I have my hands full with what I do now. 

It is likely they would get a fee credit depending on how long ago they bought from you, you made a commission.  Safest thing to do is avoid converting any existing clients for 2 years unless they ask.

Am I reading this correctly, you are discussing how quickly you can move an A share to fee based?  2 YEARS jw?  You have got to be kidding me!!  If you start a client with a commisioned product, then later decide that fee based would be better FOR THAT MONEY, you should wait longer than two years.  My firm is also 2 years to move, however if you bought something less than 5 years ago, I do not make the move.

Understand 2 years is the minimum.  If someone is in A shares with a $500k breakpoint, and it is 2 years later, I really don't see a major problem there.  If it was $25k 6 months ago, of course you have to wait a heck of a lot longer.  Also remember most firms do a fee credit to reduce fees until the client is made whole on the commissions paid.  What is completely wrong is to hit the client for 6% commission, then move them to fee based weeks later, and start charging fees.  Every situation must be looked at thoroughly, and best interest of client comes first obviously.  I did not realize my previous post needed to go into these details, did not realize the level of cynicism was so high.

How many investment strategies do you give up on after 2 years?   Mutual funds are long term investments.  If it were a short term investment you should have used C shares.  If someone agreed to pay a commission on day one breakpoint or not, I do not believe they should be moved to a fee based account in general.  Of course there are unique circumstances that would dictate the move, but in general no.  Here is my rule of thumb, (assuming good reason) would you move client to another fund family into another A share?  Find me someone who does it in 2 years and I will show you someone who compliance is watching closely.  My objection is people taking a good fund and sliding the same fund into a fee based account after a certain amount of time.  I do not care if it is 10 years, in my opinion this is wrong. 

I’ll second you sentiments, Primo.

A shares will remain the least expensive way for the long-term investors ro buy mutual funds.  Lest expensive doesn’t always mean the best.  My Taurus is cheaper than your AMG. That must mean my Taurus is the best car, right. 

Sorry, my point was that if you have a fee based model, like the one upcoming at Jones,  you don’t have to worry about whether or not you can make a switch.  You just do it.

[quote=Borker Boy]

After 2 years I have no problem selling off A shares and going to fees with an all ETF or No-load index stategy. This is because the costs moving forward, while slightly more, are worth it. Why? Because we no longer have to worry about breakpoints, I can truly diversify (sorry, AF are all very similar),  and I am now paid on OLD money not just on NEW money coming in. This really focuses me on services them rather than chasing new money. Also removes product conflict of interest.