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Changing Your Business Model

Clear objectives and careful preparation will ensure success.

By W. Thomas Cross, CLU, ChFC

If you have not considered moving your practice from commission-based to fee-based compensation, now may be a great time to do it.

I’ve read that assets in managed accounts rose by more than 14 percent in the fourth quarter of 2001 to $766.9 billion. Broker-sponsored separate accounts, along with consultant programs, brought in a total of $422.1 billion in assets under management. This shows a substantial combined growth rate of 6.8 percent since the beginning of 2001. Compare this increase with the decline in long-term mutual funds, which posted a $322 billion decline in assets, or a negative 7.5 percent growth for the year.

From this data, it seems obvious that if you do not take the trend toward fee-based money management seriously, you may lose clients and revenue. Converting your book of business to a fee-based model will allow you to capitalize on these changes in the investment business. The fee-based model lets you build long-term relationships with your clients and cultivate loyalty. It also shows that you are a trusted advisor who helps his clients decide on the most appropriate course of action based on their needs and objectives—not on the commissions you stand to make.

Steps to success
Like any change to your practice, you will need to thoroughly think through each phase of the process. Here are three important steps:

1. Get registered: You must register as an investment advisor to charge fees and work in an asset-advisory business. You must also become a registered investment advisor and register, using Form ADV in each state in which you want to do business. Be aware that each state will have different filing requirements and that you should find a broker-dealer who can assist you with the filings and the forms.

2. Assess your goals and operations: This step is critical in making sure you are prepared to run a fee-based business. You need to know the strengths of the practice that you want to market, as well as the weaknesses you want to manage during the conversion. Don’t attempt to “wing it.” You need to set aside some time each day to think through the elements of your business plan. It might be helpful to use professional consultation and coaching during this phase.

3. Transition: Now’s the time to create the conversion plan. Among under things, the plan should have:
· Short, medium and long-range objectives
· Number of hours you can dedicate each week to the project
· Tasks you wish to assign your staff
· Current workload
· A price list for the services you perform
· A client-by-client evaluation of your book of business
· The method by which you will approach your clients about the conversion

As you plan the conversion, you may be concerned about losing income. One way to minimize your financial loss is to convert only 15 percent of your commission business each year to the fee-based model. This approach will help to minimize any negative economic impact to your practice and make the transition gradual.

Critical issues
Let’s address the issues you need to consider as you switch to a fee-based practice:

  • Business plan: This includes marketing your services, an overall business strategy and financial projections.

  • Marketing plan: Decide which clients to target, the services you’ll need to provide and a fee structure.

  • Practice operations: Examine your equipment needs, staffing requirements and staff training.

  • Client profile: Build a client profile that includes the number of clients you have, their average portfolio size and a business breakdown (brokerage vs. nonbrokerage business).

  • Legal and compliance: Be aware of changes in licensing, registration and errors & omissions insurance.

  • Office preparation: Prepare a projected budget, buy any specialized software you need, consider staffing needs, plan time commitments for the transition and the new work structure and decide on a training process.

  • Conversion preparation: Script your transition and practice the move at the same time as you meet with clients to help them through the transition.

What is at stake is your long-term business survival. The five major New York wire houses currently dominate the distribution of assets in fee-based managed accounts and control about 70 percent of the market. But other firms and programs are beginning to make a path into this competitive marketplace. Competition will drive down prices and increase business for advisors who have carefully prepared their value-added client programs.

W. Thomas Cross, CLU, ChFC, is senior vice president, product distribution, of Securities America, Inc., Omaha, Neb. You can reach him at

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