Going Fee-Based? - Telling your client you’ll start taking their interests into account might not cut it

The following is based on one of The Covenant Group’s clients. All of the names and telling details have been changed.

When we first met Karl Stihl, he had been trying to transition his business to a fee-based model but had run into serious trouble.

Karl had been an advisor for over twelve years, starting as a fund salesman but evolving over the years into a full-service practitioner who offered financial plans on a fee basis. The next step for Karl was to charge fees on the implementation side, rather than charging commissions on a transaction basis.

Unfortunately, eight months into the transition, Karl’s business was hurting.

When we asked Karl what the problem was, he explained that a number of his clients had called recently to complain about the fees they were paying. Their portfolios had declined, and they weren’t happy about paying Karl on top of their losses. Most of the callers were Karl’s top clients.

Karl had a serious problem, but before dealing with it, we wanted to get at the root cause. We asked Karl why he decided to go fee-based.

Karl explained that he didn’t enjoy riding the revenue roller coaster. He loved the idea of levelling out his income, of waking up on January first each year with a good idea of what his revenue stream for the year would be. As well, he anticipated that going fee-based would allow him to move upmarket. And with new offerings at his disposal, like managed accounts, he’d be more attractive to high-net-worth prospects.

“Karl,” our coach explained, “I can certainly see why you were attracted to the fee-based model, but I didn’t hear any mention of why it would be good for your client.”

Karl blushed. “I didn’t make the move just because it would be good for me. It’ll be good for my clients too.”

Our coach asked how.

“It takes out any conflict of interest. I do well only when my clients do well.”

“Karl,” our coach explained, “I hear a lot of advisors talking about how a fee-based business puts them on the same side of the table as the client. But in our experience, how you get paid doesn’t really have an impact on how you relate to your clients. Some of the most client-focused advisors we know are commission-based. We find that an advisor’s relationship to their clients is a function of their integrity, not their pay model. And don’t you think telling clients that going fee-based will mean you’ll start taking their interests into account might reflect badly on you? Surely your clients are with you because you’ve had their interests in mind all along.”

Karl nodded.

“Karl, so what are the real benefits to your clients of going fee-based?”

Karl thought for a moment, and then answered, “I’ll be able to offer improved service.”

“How?”

“I won’t be running around trying to scramble for sales, so I’ll be able to focus more on my clients.”

“But how? Give me some concrete examples.”

Karl fell silent.

“If that’s true, if going fee-based is going to free you up to focus on your clients, you need a clear picture of how your service is going to be different. What will you be doing that you’re not doing now.”

“I want to develop detailed annual reviews of my client’s situations and reports on how they’re doing against their goals.”

“Do you have a plan for how you’re going to develop these reports? What they’ll look like? What resources or suppliers you’ll use to help you? When you’ll start issuing these reports?”

Karl shook his head.

“First of all, I think your idea for improved reports is a good one, but don’t let it be wishful thinking. You need a plan for how you are going to deliver this new service component. In fact, you need to look at what your overall service is going to look like in the fee-based model. When talking to your clients about making the change, you need to show them how doing so will have a positive impact on how you relate to them. Telling them that you’ll be on their side from now on isn’t going to cut it. Paint them a picture of your new service model. Show them a sample of what their report is going to look like. And if improving your service means spending more time with them, show them how. How much time? How often?”

Karl nodded.

“You also have to look at what other changes you’re going to have to make to fulfil your commitment to your clients. Are you going to have to invest in technology? Hire assistants?

“The point I’m trying to make, Karl, is that the problems you’re having with your transition are really symptomatic of your lack of a plan for your business. In fact, even talking about what your service is going to look like and resource issues are jumping the gun. Because the first thing you need to do is create a sound business plan, beginning with a vision.

“What does your business look like three, four, five years from now? How much of it is fee-based? What services do you offer? What markets do you work in? You have to answer these questions before beginning the process of transferring your business.

“And once you’ve articulated your vision, you need to figure out how you are going to realize that vision. And that means developing your marketing, sales, service, and resource plans.

“You’ll find that an effective marketing plan is one of the critical success factors for making a smooth transition. Your marketing plan is where you figure out whom you are going to approach and how. One of the mistakes you’ve made in marketing your fee-based service is in going to your top clients first - before perfecting your method. Why not start with less significant clients, with whom you can afford to make mistakes.

“Like many advisors, Karl, you’ve mentioned how going fee-based will help you move upmarket. But penetrating the high-net-worth market requires a well-developed marketing plan. You can’t simply decide you’re going to go after wealthy clients and apply the same methods you’re using in mid-tier markets. To gain access to top clients, you’ll have to apply marketing strategies that work for them. You’ll have to start thinking about gaining introductions instead of referrals, about establishing prestige in specific target markets by writing articles in trade journals, about running concept lunches. Otherwise, moving upmarket will be a holy grail for you.”

Karl was embarrassed that he hadn’t thought through the transition to a fee-based business to the extent he needed to. But he was relieved to have identified what he’d done wrong and encouraged to know there was a solution. I suggested to Karl that he enroll in a practice development program we were offering through one of his sponsoring companies. He did so, and over the next few months developed and put in place a sound plan for going fee-based.

Now, a year after coming to see me, Karl’s transition is going smoothly. He repaired the relationships with his large clients after reselling them on the benefits of going fee-based. He put in place the technology and resource solutions he needed and had started delivering on his service promises. He developed and implemented a number of marketing initiatives targeted at high-net-worth individuals and had landed a number of significant accounts. As he put it, the fee-based future looked bright at last.

Lessons Learned

Karl learned that moving to a fee-based business model requires a sound business plan. He realized that he’d been struggling because he didn’t have a clear idea of how his clients would benefit from the transfer, nor how he should go about demonstrating those benefits. Furthermore, without a plan, he knew he’d have trouble delivering on any promised benefits.

Karl’s business plan established a clear vision of what his fee-based business would look like in three years. The rest of his plan articulated precisely how he was going to achieve that vision. The sales and service component outlined how he was going to improve his service and included a logical rollout of various improvements over the coming years. His resource strategy indicated what hires he would need to make and when, and what suppliers he was going to use. And his marketing plan laid out a sensible plan for working through his client base, cutting his teeth on smaller clients first, and then approaching key accounts after perfecting his message. Furthermore, his marketing plan ensured that he was able to move upmarket and truly realize the benefit of going fee-based.

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The Covenant Group is referred to by many as where entrepreneurs go to become Business Builders. They are considered to be thought leaders and authors of the best-selling books, The 8 Best Practices of High-Performing Salespeople, The Entrepreneurial Journey, and The Business Builder.