Adviser > News > February 2010 > Moving your business towards a fee-based structure
Moving your business towards a fee-based structure
Find out from our Business Development Manager Fiona Tait how segmenting your service levels can provide the basis for a profitable business model which satisfies your TCF and RDR requirements.
Fiona Tait
As the Retail Distribution Review (RDR) roll out gains momentum, more advisers and business owners are coming to the view that like it or not, they will have to make some changes to the way in which they do business. Many have already started to charge fees for their advice while others are looking for guidance.
Here is a summary of the key points I have picked up from the advisers who have already managed this transition.
Calculate your cost per client
A common feature for all those successfully running a fee-based structure is that they had all measured how much it cost them to provide a service to each of their clients. That's right, every individual client.
How you can do this
A good starting point is to set up a spreadsheet to record the hours spent on each client, not just by you but by every member of your firm. You can then calculate what proportion of your income they need to generate, which in turn can help you to apply an hourly cost for each of the services they receive.
Benefits
This does not mean that you will necessarily end up charging hourly fees. Many advisers found this unsuitable, but knowing their costs did allow them to base their initial and annual/retainer fees on the amount of work that they estimated would be required.
If this estimate proved to be incorrect they could then write to the client and explain what extra work they had carried out and why. Most said that their clients understood the adviser's need to charge according to the work done.
It also doesn't mean the client will actually pay you a fee. Using a fee-based charging structure helps you to run a profitable business model. However, clients may well prefer to settle their account via a deduction from any products sold. Yes this is commission, but it's a commission based on the work done and quite independent of the selected product.
Decide how to deal with non-profitable clients
Every adviser has some clients who cost more to service than the income they generate.
Decide whether you can continue to offer a service
The simplest option is to inform these clients that you can no longer service them. Many advisers find this difficult and would like to maintain some level of service for a selected number of these clients.
Most fee-based advisers eventually reject the idea of any pro bono services for existing clients. If it is offered the client costs are still recorded and may be factored into the rates charged to other clients.
Use technology to reduce costs
Another option is to reduce the cost of servicing these clients. You can use technology to reduce the time spent on them and look at using other, less expensive, members of staff to carry out basic tasks. For example, instead of doing manual reviews each year you can set up rebalancing and lifestyle options that keep the client's investments on track.
Offer a menu of services
This leads to segmentation. Clients have different needs and demand different levels of service. Calculating the cost of each of your services allows you to offer them a menu to choose from. Each client only pays for the services they need and you can sell the fact that they do not end up effectively paying for those offered to anyone else. It also delivers the vital "profit per x" (in this case clients) that many business owners consider key to success.
Sell the benefits of financial advice
Successful fee-based advisers are adept at explaining the benefits of their services.
A common theme to the "my clients won't pay fees" argument is that people just don't see the need for financial advice. This is true in many cases, which means you will have to tell them.
Rather than providing a list of services, devise a way in which you can explain what difference they will make to the client's current position. For example: if you offer a review service explain that you need to keep monitoring the client's portfolio otherwise it could become more risky than they are prepared to accept. If investment portfolios are left alone they will certainly change, and based on expected outperformance of the equity component, are likely to become riskier over time.
Set a 3 year strategy
Most fee-based advisers agree that it takes at least 3 years to make the transition from fees to commission, and most continue to make adjustments well after this time. A phased approach is much easier than trying to accomplish a major change to the way in which you do business all in one go.
If you start planning now, you can set yourself a series of objectives, for example 10% of income in the form of adviser charges in year 1, 30% in year 2 and 100% by the end of year 3. One way of doing this is to use:
- the first year to measure and analyse costs for your existing clients,
- the second year implementing adviser charges to a selection of clients and
- the third extending it to all your clients.
Benefits of a phased transition approach
This approach also allows you to prepare your clients for what is to come instead of just dropping it on them and gives you the opportunity to provide your clients with clear evidence of just how much work you do for them. I suspect many of them will be surprised.
Support available
Many organisations run training sessions for IFA business owners and/or provide support material. I was fortunate enough to be given a demonstration of AIFA's Business Transition toolkit and was impressed by how comprehensive it is. It also has the added advantage of having been designed by an IFA organisation for IFAs to use.
Do investigate this toolkit (AIFA membership required) and other options on the market and choose one that will suit your way of doing business.
For professional advisers only
