Transition clients to fee-based

By Craig White and Grant White | May 28, 2014 | Last updated on September 21, 2023
3 min read

Advisors are moving away from traditional transaction-based billing structure to fee-based. The new model has several advantages.

1. It can allow an advisor to increase his revenue from clients who don’t trade often.

2. It can create a recurring stream of revenue, which is more predictable and reliable.

3. As a result, it can eliminate any temptation to sell products based solely on high commissions.

But the best reason to transition is that a fee-based model further aligns an advisor’s and client’s interests. And that’s what you must explain to clients when making the switch.

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For instance, if an advisor gets paid by making more trades on behalf of his clients, then his incentive is to trade as often as possible. This may or may not be in the client’s best interests, and could be perceived as a conflict of interest.

Meanwhile, explain how a fee-based model allows an advisor to make money by growing his client’s portfolio, and providing services that encourage the client to transfer more money into his investment account. If the advisor loses money for the client, then he’ll also take a proportionate pay cut.

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Still, there can be challenges. Clients may think their costs will increase if they switch to fee-based.

We spoke to one of our clients who was extremely reluctant to make the move since he’d been with a transactional advisor for many years. He did not trade often, and was very sensitive to fees.

One way we overcame his objections was to show him how we earned those fees. We looked at his account and asked him questions about his past investment experience. We identified that when his portfolio was doing well, trades were more frequent. But when markets were poor, his past advisors made fewer trades. We explained that’s because some advisors avoid calling a client when he’s lost money, because that client is unlikely to agree to more transactions. So the service level provided to the client ultimately suffers, and, more than likely, so does portfolio performance.

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In our case, the client’s portfolio had underperformed because there was often no activity when it was probably needed the most — when markets were down. The client agreed that switching to a fee-based model could increase performance and would be worth the fees paid to us.

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Ultimately, you won’t always be able to convince clients that fee-based models are preferable. When that occurs, you have to make a decision on whether you want to manage transactional clients, make an exception in a particular case, or refer the client to another advisor.

We rarely take on transactional clients because we want to be consistent with our billing practices. A fee-based model allows us to provide better service to clients, and allows us to get paid fairly to do so. We think that’s a great deal for both the client and the advisor.

Craig White and Grant White

Craig White and Grant White are investment advisors at Craig & Grant White Family Wealth Management Group, National Bank Financial.