Switching to fee? Better plan ahead

By Deanne Gage | June 11, 2009 | Last updated on June 11, 2009
4 min read

If advisors think the timing’s all wrong to transition from a commission practice to charging fees, they should reconsider, according to a panel of advisors who have made the leap.

“It will only hurt more once you grow accustomed to a lifestyle associated with a certain revenue stream,” says John De Goey, vice-president with Toronto-based Burgeonvest Securities Ltd. “The longer you wait, the revenue “will be that much harder to forego.”

De Goey, along with Marc Lamontagne of Ryan and Lamontagne Inc., Terry Ritchie of Transition Financial Advisors Group Inc. and Shawn Bryman, president of PlanPlus Inc., was part of a panel discussing the merits and nuances of making the switch to a fee-based practice at the Canadian Institute of Financial Planners annual conference in Halifax this week.

About 85% of De Goey’s practice has been converted to a fee-based model, while Lamontagne runs a fee-based and fee-for-service practice. Lamontagne doesn’t have an account minimum for charging fees; instead he offers a fee selection that covers everything from clients who just require an hour of his time, to someone who wants a modular plan or one who needs comprehensive financial planning.

“I tend to look at my fees as accommodating any level of client,” he said. “But if a client says, ‘I want you to manage my investments,’ typically my minimum is $250,000 but that doesn’t mean I can’t offer them a financial plan.”

Ritchie has designations and licenses in Canada and the United States, giving his service added value for clients who have dual citizenship in those countries or face cross-border issues. He constructs comprehensive financial plans where there is a minimum fee of $10,500, with half of that amount required upfront. For clients who require more of a wealth management approach, he charges 1% on the first million dollars in assets and the percentage decreases from that point. Ritchie also offers a tax preparation service, where additional fees apply.

Making the transition is often a philosophical choice, the panelists agreed, noting that they define fees as asset-based, charged directly to the client and without embedded compensation. De Goey noted some advisors who receive trailers incorrectly call themselves fee-based.

“Trailers are considered commissions by the CRA, IFIC and the MFDA,” he said. “So if you are calling a trailer a fee, you are not being as accurate as you could be.”

Value for money While advisors understand the difference between passive and active investing, De Goey wondered whether this debate is ever discussed with clients. “Irrespective of what option you recommend, if the client wants the other option, will you accommodate the client?” he said.

Bryman, who has published research on the subject, believes it’s a question of value. “Whether we like it or not, the client is paying a whole bunch of money to the financial services sector which includes us and they’re paying commission or MERs and fees in the investment products,” he said. “[The advisor’s] job is to provide good value for that, but we have to ask ourselves if clients are really getting value for their money.”

According to Lamontagne, part of the transition barrier comes from not setting up an actual plan. According to a study conducted by his consulting firm, respondents had three major issues with making the switch — how to set up the fees, how to notify clients, and finally, the drop in revenue.

“What surprised me was there didn’t seem to be any concern about the perception of value or any concern about asking clients for money,” he said. “Anecdotally, this is what advisors tell me.”

One mistake advisors make is starting the transition with their A-level clients. It’s a good intention but some misfires can occur during the process phase of transitioning which may “hurt your overall relationship and the client may end up leaving.”

The opposite strategy, beginning with unprofitable or low-priority clients, also doesn’t work. The approach sounds good in theory: get them signed up and increase revenue from the get-go. There is just one slight issue: smaller clients are least likely to make the transition in the first place, Lamontagne said.

This leaves the mid-tier clients. Lamontagne recommends structuring fee services and schedules with those clients in mind. Start with clients with whom you have a good relationship and consider advocates. “What you want to do is build up momentum,” he said, noting that you will then gain confidence as you work your away up to your top clients.

As for the expected drop in revenue, many studies suggest advisors prepare for a 40% decrease. But Lamontagne found that, of those respondents who had prepared a transition plan, revenue dropped 20% or less and most had come back up to their pre-transition levels within two years. Also of note: those with transition plans made the switch much faster and often signed up six or more clients at a time versus those who had no plan and took a much more casual approach.

For more information on Marc Lamontagne and Terry Ritchie’s approaches to fees, check out the June issue of Advisor’s Edge.


Deanne Gage