What’s the right fee structure for you?

Trail commission. Is it the silver bullet that enables Financial Brokers to be paid for the value they add, to build value in their businesses and eventually sell the business at a healthy multiple? Or is it a somewhat opaque way for advisers to be paid, sometimes with very tenuous links between the value provided by the adviser and the payment received?

Trail commission is far and away the most popular method of ongoing fee collection today. First of all it’s relatively easily explained. Clients understand it. And of course trail is very easily collected. Clients don’t have to write another cheque, which is always a potential hurdle. Clients also see a level of alignment of interest – if the portfolio sees strong growth, both the client and the adviser win. Also there is no VAT payable on trail commission, that will apply to retainers and fees if the adviser’s fee based turnover threshold for VAT of €37,500 is exceeded. This is good news for personal clients.

For the adviser, trail makes a lot of sense. It’s the most used factor in advice firm value calculations and trail tends to naturally increase each year in line with portfolio growth, and as new contributions are paid into investments and pension policies. Very importantly too, it doesn’t tend to dominate review meeting conversations. Many advisers have moved to Modular AUM-based Pricing, which is where prices are linked to AUM, but then varied based on the level of service. This has become very popular in Ireland, as the focus of the conversation shifts from the price paid to the value added.

But trail is not perfect. As we see asset management fees fall dramatically in some markets (note Fidelity’s recent announcement of zero charge funds – yes, you read it right!), trail levels will come under a lot more scrutiny. In any case, some advisers (and/or their clients) already baulk at the idea of their remuneration being based on the client’s asset levels rather than the value provided. This might be where fees come in.

 

How do you structure a fee?

I am often asked this question by advisers who have decided to go down the fees route, usually just for a segment of their clients, but on occasion for their business as a whole.

There are of course many different ways of structuring fees – below are listed some of the most common structures used in Ireland and/or in other markets. Of course each of them has their merits and drawbacks, but hopefully this list will help you identify one or more structures that suit you and your business. First of all, the most common structures are,

  • A fixed rate for each service (plan preparation, annual review service etc.). These rates can differ for different levels of complexity associated with different clients.
  • The “McDonalds Menu” approach of bundling services together into service packages, and then charging different fixed fee levels for different service packages.
  • A monthly retainer

Some advisers are now combining one or more of these, including combining them with trail commission. The most often used combination is a fixed fee for preparation of a financial plan alongside modular based trail commission or a retainer for ongoing services.

Other less often used structures include,

  • Hourly charging – rates are quoted by lots of advisers here, but few actually end up using this basis…
  • A model used by advisers in some markets aimed at millennials and others with low asset levels but often high incomes, is advice fees linked to the client’s income and net worth, instead of to AUM.
  • A subscription model based on client preference and personality. A client who is a “delegator” pays more than a client who is simply looking for validation of their own decisions, who in turn pays more than a DIY client who simply wants help with product execution.

As you can see, there are many different bases that can be used, and often the preferred structure is a combination of different structures. The challenge for you is to identify the model that fits best with your own client proposition and that reflects the value that you are adding.

How do you approach increasing your fees?

One of the areas of greatest challenge for financial planners in Ireland today is increasing the level of your fees / trail commission from the levels that you are currently charging. But time marches along, and often when you actually turn to really examining the issue, many advisers find that their charges haven’t increased at all in the last 10 years! There are very few other professions where this would be the case.

The comments that I hear are,

“It’s all well and good that UK & US advisers charge 1%, as their asset management fees are so low” 

and “You can’t charge more than 0.25% / 0.5% p.a. (or fees of €1,500 / €2,000 p.a.) and justify it”.

However, there are growing numbers of Irish advisers that do charge more and their clients happily pay more. So how do they do it?

 

Their proposition stacks up

Please note, this article is not about the merit of trail v fees, that’s a whole other conversation! For the purpose of this article, I’m simply going to call them both fees.

Advisers that attract higher levels of fees tend to have superior propositions. They have put a lot of time and energy into really thinking through their client proposition and the value that clients experience from working with their firm. There’s no grey in the proposition – they are crystal clear about all of the value areas.

When this work is done properly, very quickly all of the new areas of value that you provide become apparent, and you see where your proposition has grown and how you provide more value today than you did when your fees were set. All of this added value at no extra cost (currently)…

Once you start to clearly identify these areas of additional value, you’ve taken the first step to increasing your fees.

 

They actively communicate their value

This is often the area of biggest challenge, particularly with existing clients. Actually having that conversation with a client about the value being added. It’s always easier just to talk to the client about their financial plan, their cashflows and their policies – it all feels a bit “American” to have a chat about the value being added!

But if you don’t have this conversation, all you can do is cross your fingers and hope your clients see the value they are getting…

This conversation has to be highly structured (by you) and very well practiced. You need to be able to clearly demonstrate that you’re not just “winging it”, hoping to increase your fees on a case by case basis. Instead by clearly articulating the services that you provide, the value derived from them and the cost of them, clients can see what they are getting for their fees.

From experience, this tends to work best when advisers offer multiple (2 or 3 usually) service packages. The higher value packages show the increased services being offered for the higher fee levels. Also if a client is not willing to pay a higher fee level, they clearly see the services that they won’t be getting.

 

They justify their fees

The communication is critical, but a slick sales pitch is not enough! Advisers who charge higher fees clearly justify those higher fees. This is achieved through providing a range of evidence,

 

  1. A statement of financial improvement is where you demonstrate to your client the actual € value of your advice – this might be in a net worth statement, portfolio increase, tax saved, costs saved or other such metrics
  2. A client calendar of all the interactions that you carried out with / for them over the last 6 or 12 months such as the meetings you had, the phone conversations, the newsletters you sent them and the events you invited them to etc. Not forgetting of course the updates to their plan and cashflows, the portfolio rebalancing and ad-hoc service requests.
  3. Timesheets are provided by some advisers to demonstrate the level of work carried out on the client’s behalf and providing a justification of fees in the process.

 

When you start pulling all of these strands together, it can seem like a lot of work to be undertaking. However the prize is huge! You will quickly realise the value you’re adding and this will give you increased confidence to have that conversation about higher fees with your clients. They see the fantastic value they are getting from working with you, while you earn more in the process. A win-win situation!

 

How will you grow your business?

What’s the question I’m most frequently asked by both prospective and existing clients? It is “How can you help us grow our business”. Of course, there’s no one simple solution or silver bullet for this one, instead there are a number of different strategies and tactics available to you…

Before we help advice firms decide and implement the right approach for them, we carry out a very detailed analysis of your business. It’s very important that you choose your preferred strategy with your eyes wide open as to its suitability for your business in terms of a number of factors such as,

  • The new client opportunities open to you
  • Your appetite and desire to network, both online and offline
  • Your appetite to potentially develop new qualifications, services and new areas of expertise
  • Your appetite and expertise to undertake different marketing activities
  • The budget and resources available to you

 

You need to start by understanding where your strengths are and how you can best utilise them. While of course the grey quadrant looks the most attractive, it is not going to be the right strategy for many firms! So, it is worth taking a look at each of the quadrants in turn.

 

Retain

This is of course the most passive of all of the strategies, and it could be argued that it is not really a growth strategy. Maybe it’s a “prevention of loss” strategy? But it is a very important minimum approach for every firm. This entails meeting the needs of your existing clients on an ongoing basis, providing them with the advice, support and service that you promised to them at the outset of your relationship with them. This includes providing the level of service that they can reasonably expect from you, and that allows you to fully justify the income you earned already from them, and the ongoing income that you continue to earn.

While this may appear too passive to some, this is a strategy that may make sense for advisers coming towards the end of their career. Your business may have delivered the lifestyle that you wanted over the years, with the final task being to retain your book of clients with a view to selling it in the not too distant future.

 

Grow your client book

This is the more traditional approach, coming from an era when an adviser’s income was generated largely by initial commission. While of course new clients are still very important to every business, they are not the single driver of success that they used to be. If we look back 20 or 30 years in the financial advice sector, ongoing service to clients played a much lesser role and resulted in very low levels of ongoing income. As a result, businesses survived by a constant stream of new clients. And this in turn resulted in advice firms having lots of “transaction based” client relationships, as opposed to the deeper client relationships that we see today.

Of course there are many firms continuing to pursue a client acquisition strategy today, constantly seeking to bring new clients on-board and looking to grow their overall client numbers. For the networkers / rainmakers among you, this may be the strategy for you. It’s hard, because you need to be constantly “out there”. But if your skill set is in this area (and not necessarily in the areas as set out below) and you have the right supports around you, this may be your preferred approach.

One of the downsides of this approach is with less of a focus on ongoing services, you cannot command the same levels of ongoing remuneration and as a result this will dampen future valuations of your business. This also requires a higher marketing spend, as you attend events, entertain prospects, advertise and carry out sponsorships to raise awareness of your brand and undertake other client acquisition strategies.

 

Increase Income per Client

This is the area today where I spend most of my time with my adviser clients. Under our “Getting to 1%” programme, we pose the valid question – Why and how do advisers in other developed markets (and some advisers in Ireland) charge an ongoing fee / trail commission of 1% of assets, while in Ireland it’s typically 0.25% to 0.5% p.a.?

The answer lies in having a client proposition that justifies higher income levels and then being able to communicate that effectively. This takes significant effort, thought and work. It may take higher levels of qualifications, new skills and broadening out the services that you provide. We see this in financial advice firms today evolving into financial planning firms. These firms are developing much deeper relationships with clients through providing lifestyle financial planning, with future cashflow planning being a core element of this. This takes investment in your business, time and effort to develop the required technical skills and capabilities. And then you have to be able to communicate it all effectively across all platforms. Some advisers who are in this quadrant are actually seeking to reduce the number of clients overall. This is typically where they are trying to shed transactional clients who are not open to deeper relationships.

The payback for advisers who successfully carry out this strategy is immense. The same (or lower) number of clients, but now generating multiples of the level of income that you were previously getting.

 

Grow Clients and Deepen Services

Is this nirvana? From my experience this happens as a result of successfully occupying the green quadrant – increasing income per client. Where advisers offer an excellent client proposition and are communicating it very effectively, referrals just happen because your clients love what you do and talk about it. So some of these firms in the green quadrant end up in the grey, because new “perfect” clients from your target markets come looking for your services. Isn’t this the best place to be?

“I know someone who’ll charge me less”

You’ve all been there… the fight over price. You know you’re right for the client, you can add a lot of value, but you can see there is an immediate issue niggling away. You probe the client and they say something along the lines of, “Let’s cut to the chase, what do you charge as I’m talking to another adviser who will manage my assets for 0.25% p.a.”?

Assuming you charge 0.5%, 0.75% or even 1% p.a., what do you do?

 

1. Now’s not the time for negotiation

The fatal mistake is to start negotiating your price now. After all, the client has absolutely no idea what they are paying for at this stage, and the value that they will get from working with you. Obviously you can’t ignore the question, but the answer needs to be along the lines of, “I can hear that our price is a key consideration for you. Let me set out what we do first, as there are a range of different options available to you”.

Don’t let yourself get dragged into a price war at this stage!

 

2. Go through your normal initial meeting process

This is where you take control of the meeting again. Rewind the meeting to understanding the client’s objectives (through careful, open questioning) and then presenting how and what you do. This is where you set out your advice process, your annual review meeting process and the ongoing service packages that you offer. Assuming you offer differentiated service levels for different segments of clients, your client will now see what you have to offer at different price points. If the client wants rock bottom pricing, well then he / she will see that they won’t be getting a premium service at that price level.

In order for your competitor to offer such a low price, they are probably not promising anything! So the other advantage of taking the client through your approach is that it will demonstrate the significant advantage of working with you as opposed to your competitor.

 

3. Be firm and brave!

Stand by your pricing as a premium advice provider. Acknowledge that you are more expensive; your client will actually respect you for this. Yes you can have lower cost packages, but within these the client should be left in no doubt about what is included and more importantly what is not.

What if the client looks for your premium service package for a lower cost? Well then you’ve a choice to make! Yes, you can be flexible, but I suggest only if there is a good reason… maybe the client is an important access point to an attractive target market, maybe you see broader opportunities with them. Don’t just agree without a reason, or otherwise you will simply start dropping your price at the first hint of a push-back from anyone. Sometimes it’s better to walk away, rather than agreeing to a price that doesn’t make economical sense to you.

 

4. Make sure you can deliver… and prove it

If you want to charge higher prices than your competitor, you have to able to deliver more. So it is very important that you can actually deliver what you promise. The last place you want to end up in is the dreaded “over-promising and under-delivering” experience for clients. This is the certain road to losing clients.

Of course your prospective client won’t have experienced your service at this stage of your relationship. So this is where you need to be able to call upon the experiences of other satisfied clients to add validity to your promises. This is where those client testimonials, LinkedIn recommendations and case studies of previous work come to the fore. They paint the clear picture of what your prospective client can expect.
5. Add value beyond the sale

Finally look to add value beyond the sale. Are there services that you can offer to your client that sit outside of your service packages? Maybe you can provide a willing 2nd opinion on any broader issues they might have in relation to financial planning? Maybe you can give them access to a broad network of business professionals that can help them in running their business? Or maybe you can refer some of your contacts to them as potential clients?

 

At the end of the day, you’ve a choice to make. Is your competitive advantage based on offering your services at the lowest price, which ultimately will be a race to the bottom? Or can you offer superior value and build your business around delivering this value, at a higher price? The choice is yours!

 

Are you really doing lifestyle financial planning?

There has been quite a significant movement over the last few years of financial brokers or advisers repositioning (or simply renaming) themselves as financial planners. This makes a huge amount of sense, because of the value that lifestyle financial planning brings to people’s lives. But it only makes sense when lifestyle financial planning is what is actually being delivered.

 

Why is Lifestyle Financial Planning so important for you, the planner?

There are two answers to this question. The first and most important reason is because of the impact it has on the lives of clients. It’s not about investing money, it’s about helping clients to achieve their lifetime goals and dreams, and to lead more fulfilled lives through making behavioural changes. Good financial planning simply improves the lives of clients.

The second is a defensive reason. I still haven’t heard a reasonable defence of how traditional financial advisers will be able to defend themselves if or when a proposition similar to Vanguard’s lands on our shores. As it will one day. For those of you who are unaware, Vanguard rolled out a new proposition in the UK this year, offering their passive funds directly to investors with an administration charge of 0.15% of assets. And the charge is capped at asset levels of £250,000. On top of this, they are hiring 3,000 CFPs who will give advice over the phone to clients for 0.30%. If all you do is help clients make investment choices, how will you compete with that?

 

What is lifestyle financial planning?

It consists of four main phases, and it’s not lifestyle financial planning if any of these phases are skipped over. The four phases are

1. Discovery

This is the phase that gets skipped over the most, which is a shame as this is the most important of all of the stages. This is the phase where the planner finds out the lifetime goals and ambitions of their client, where the client can visualise the outcomes in their own terms – the life that they will lead, the possessions that they will own, the impact they will be able to have on the lives of others, what they will do and achieve in their lives.

Until you know the answer to these questions, what are you planning for? Just building a pot of money with no idea of what it will allow your client to do?

This phase is carried out by careful and well thought out questioning by the planner. And then listening intensely. It is not “airy fairy”, instead it is the most important conversation that you will have with your client.

2. Planning

This is where the planner then uses his/her expertise to develop the roadmap for the client to get from where they are today, to achieving the life they visualised in the discovery phase. This is an area of comfort for planners, where you can utilise all of your experience and technical skills to develop a plan for your clients. As a result though of the comfort at this stage, some planners rush to it without properly completing the discovery phase – when that happens, you are no longer carrying out lifestyle financial planning.

Central also to this phase is the use of future cashflow planning. Again without it, it’s not lifestyle financial planning. Using this process you can demonstrate to clients if they are on track to lead the life they visualised and if not, what they need to do to get on track. You can show them the impact of unforeseen events and how to plan for them, the impact of changing goals and of course the actions they need to carry out, or products they need to put in place to achieve the plan.

3. Implementation

The most straightforward of all of the phases. This is where the planner assists the clients in carrying out the required activities (e.g. budgeting, bank accounts, wills, power of attorney) or putting the required financial products in place that will play a role in achieving the goals of the plan.

4. The ongoing journey

This is again a really important stage that sometimes doesn’t get enough attention. Regular contact and scheduled meetings sit at the heart of lifestyle financial planning. The ongoing interactions turn the plan into a real journey towards the client achieving their lifetime ambitions. They are the opportunity to review and restate / change goals, review the progress and performance of the actions and products that were implemented and keep the client on track in terms of their behaviours with their money and their investments.

Without these meetings happening as scheduled, it is akin to pushing a boat away from the harbour wall to sail the stormy seas alone… You need to be beside your client at every turn, helping them to navigate their way towards their dreams.

 

If you are carrying out these four phases of work consistently and expertly with your clients, you can change their lives and help them achieve their desired goals and dreams.

How can you secure your ongoing future income stream

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. Most are somewhere along the journey of shifting to a model where clients are paying for the advice they receive, rather than the products sold. So what are the key factors to consider in building your income stream?


The products sold still play a role for most advisers

Product sales still play a role for many advisers. First of all, when it comes to protection products, the providers have helped advisers in this regard by introducing commission models in recent years that offer attractive spread commission options without the dreaded commission claw back 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. Most advisers have moved 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 easy to explain to a client.

Of course many of you also charge fees for your advice, so fees and commission make up your ongoing income. But how do you justify this ongoing income?

 

The brightest future is in lifetime financial planning

The future is in financial planning, because this is where you can add the most value. Helping your client to understand their lifestyle objectives and to set financial goals, examining their current situation, and then devising and implementing a plan to close that gap. And then by working with that client year in and year out towards the achievement of their goals, you can build and easily justify your ongoing income.


You need a clear ongoing advice proposition

To show your ongoing value to clients, 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.


The benefits for you are huge

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.