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By: Patti Ryan
March 5, 2002
Investor Insight
Morningstar Canada
Fee-based advice is the way of the future.
Still generating most of your income from commissions? Get with
the program, says one expert who believes that fee-based business
is the way to go.
"If you haven't switched, you might as well just shoot yourself,"
says Bob Simpson, president of Mississauga-based Synchronicity Business
Coaching Inc. "My advice is to stop thinking about switching
and get on with it."
The fee-based trend, he says, has been going on for more than 10
years now, and if you're not part of it, you're going the way of
the dinosaur.
Simpson defines a fee-based business model as anything that generates
recurring revenue, and insists that switching to one is child's
play.
"From the advisor standpoint, switching is just a move from
transaction-based revenue to recurring revenue, whether you're talking
about mutual funds with trailer fees or wrap programs where the
fees come directly out of clients' pockets," he says.
A major advantage of being fee-based, says Simpson, is that it
reduces or eliminates the perception of conflict of interest that
some clients might worry about. And that, in turn, can help build
trust-and your business.
Adrian Mastracci, president
of KCM Wealth Management says, “Being fee-only is a philosophy
that has always worked for me. It means I'm independent. I'm not
influenced by specific kinds of products.”
The other significant benefit is that you may be able to make more
money in less time.
"Say you have 100 clients in a transactional business,"
says Simpson. "If you convert them to fee-based, you make less
money at first, but you have more time. You take that free time
and convert it to client acquisition. Then you can make more money
with less stress."
How much more time you'll have will depend on how you run your
new business. Simpson recommends relying on both technology and
outsourcing in order to free up time for client relationship management.
Being fee-based, or fee-only, can also help build your business,
says Simpson, because the concept can be very attractive to clients,
for the following reasons:
- Not all clients have the time or the inclination to monitor
their investments. Turning that job over to a fee-based money
manager who will evaluate and rebalance their portfolios when
necessary lets these clients focus on career, family, travel and
leisure.
- Clients feel they have something in common with you: the mutual
desire for excellent returns. If your fees are a fixed percentage
of their assets under management, then both of you stand to gain
when their portfolios grow.
- Clients feel more valued. When your fees are not derived from
transactions, you can call clients to discuss asset allocation,
portfolio rebalancing or world politics instead of to initiate
a sale.
- Clients may feel they can trust you more. No matter how much
they like and trust you now, you can bet that in the back of their
minds, if you're commission-based, they are always aware that
you stand to gain from any transactions you make on their behalf.
Sounds good, you say-but maybe you're still not convinced about
the bottom line.
No problem there, says Adrian Mastracci, president of KCM Wealth
Management Inc. in Vancouver (www.kcmweath.com). Mastracci, who
has been a fee-only advisor since 1973, says income is related to
your skill as an advisor, not the way you're paid.
"How much income you make depends more on other factors, including
your image, your expertise and the way you manage client relationships,"
he says.
Mastracci divides his income into two streams: fees derived from
investment counsel, and fees derived from financial advice. His
fee for the former is a percentage of assets under management. For
financial advice-such as retirement, estate and tax planning-he
bills on an hourly or project basis.
He says his clients don't mind footing the entire bill for his
services. He makes sure of that upfront.
"Either they like the idea and we sign on the dotted line,
or they can walk away and they're free to find someone else,"
he says.
Mastracci believes the decision to be fee-based, or fee-only, depends
on the kind of person you are and the way you prefer to do business.
"Being fee-only is a philosophy that has always worked for
me," he says. "It means I'm independent. I'm not influenced
by specific kinds of products. And looking at it through clients'
eyes, when you're fee-only, the integrity of the counsel is as high
as possible."
But it's equally possible, he says, to be a trusted advisor if
you're commission-based, and advisors should do what works best
for them.
Simpson, however, is markedly less accommodating on the subject.
"The trend to fee-based has been happening since 1991,"
he says. "It's old news. Just go do it."
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