Many of the advisers that I talk to regularly speak of the dual challenges of earning enough revenue today from new business to pay the bills (while hopefully having a bit left over), and also moving their business model towards building up a growing, recurring revenue stream. While there is a plethora of articles written that look at the new business challenges, this post is focused on the latter challenge, moving towards building up a stable and secure ongoing revenue stream.
Indeed, when it comes to protection products, a number of the product providers are helping advisers in this regard with the emergence and growing acceptance of new commission models that offer attractive spread commission options without the dreaded commission clawback in the event of policy lapses. This allows advisers to build up their ongoing revenue stream. Once the client continues to require (and can afford) the cover, and the adviser ensures that the cover in place continues to be the best available, the adviser stands every chance of this revenue continuing.
The situation in relation to pensions and investment is a bit more complex. Historically ongoing income only came from regular premium products in the form of renewal commission. However this situation has changed significantly in recent years with many advisers moving away from large upfront commission payments on both regular and single premium business, towards lower upfront payments (by commission or fee) and a share of the ongoing annual management charge (AMC) by a trail commission.
While building up revenue through trail is challenging in the early years while asset amounts are lower, this basis is obviously more attractive in the long run as the adviser’s funds under management grow. Trail also removes the dependence on future premiums for future remuneration. Trail is also easier to explain to a client as it aligns the interest of the adviser with that of the client. Both gain from growth in the funds.
Observations from abroad
While the UK market certainly doesn’t dictate what happens in Ireland, there are often changes in this market that are worth observing. It’s interesting to note that trail commission is outlawed on business written since the Retail Distribution Review (RDR) came into effect on 1st January this year. While this was done as part of breaking the link between products and adviser remuneration, time will tell over the next few years whether this was taking a hammer to crack a nut.
However a lesson that I believe we can certainly take from the UK is that to justify ongoing remuneration, be it by adviser charging in the UK or by trail or fees in Ireland, the client will rightly expect something back in return. In short, trail commission will have to be earned. In fact (with my final reference to the UK, I promise!), there was a case taken by a client against a wealth manager who had been paid £10K in trail, but who the client claimed had provided no value. Could this happen in Ireland? The answer is, why not. So you need to ensure this doesn’t happen to you by delivering and showing your ongoing value to the client.
A clear ongoing advice proposition
To do this, you need to have a clear ongoing value proposition for your clients. Ongoing work needs to be a core part of your proposition, not a “by the way” 10 second conversation at the end of the initial product implementation. Clients do not want to feel “sold to”. This is exactly how they will feel if you don’t have a strong ongoing advice proposition to offer them. Delivering this is a natural move for those advisers who are shifting their focus from a product sale approach to an advice based offering.
Apart from obviously reviewing a client’s financial plan and product portfolio to ensure they are still on track to achieve their objectives, a structured and well thought out review approach offers you a great opportunity to remind your clients where you’ve added value to them over the year. This is where you can remind them of the growth they’ve achieved in their investment portfolio that you put together for them, the tax they saved as a result of the retirement plan you designed for them, the money they saved by you restructuring their protection portfolio and health insurance etc. Indeed one of the great benefits for those advisers who provide future cash flow modelling for their clients is it creates a natural and very valuable engagement with the client every year.
Benefits for you!
You as an adviser also benefit as a structured and well thought out review will surface any cross-selling opportunities that may exist. However the critical benefit to you is the strengthening of your relationship with your client, increasing your chances of retaining the client as their assets under management, and in turn your trail commission, increase. Surely this is a better approach than just hoping the client won’t be tempted away by another adviser who simply undercuts your trail commission amount?
And of course one of the main aims of many advisers is to build up value in your business. This is best achieved by being able to demonstrate a strong, stable revenue stream. Now is the time to develop your ongoing advice proposition to help you build up this valuable revenue stream.
What do you believe are the critical factors to help you build up your ongoing revenue stream? All your comments are very welcome below.