Profitable Transition From Commissions to Fee-Based

Transcription

1 Profitable Transition From Commissions to Fee-Based Asvin Chauhan, Cert PFS, MIFP Today we are going to learn about how to make a profitable transition from commission-only sales to a fee-based financial planning practice. The goal of today's session is to share the transferable steps we can all take to move our businesses from a transactional based cash flow to a predictable cash flow and very likely to be more profitable. Please allow me to share briefly my story of where I was when I first embarked on this journey, where I am today, and where I hope to be in the future. My story is not one of trials and tribulations, nor is it a story of being in a very uncomfortable position that motivated me to change. My story actually began in December 2006 when I had been in a three-hour mentoring session with Tony Gordon. We had spent 2 1/2 hours planning and carefully plotting my business plan for 2007, but it was in the last half hour when Tony talked to me about the business of funds under management and a recurring income stream, which is generated from an initial sale/advice but maintained via a process. I recall the conversation very clearly, But Tony I don t have any investment clients, I ve spent my whole career selling regular premium protection and some regular premium investment such as retirement plans. Ahh but Asvin, when was the last time you took a moment to add the fund values of all of those little premiums you ve been selling for the last 16 years? When was the last time you gave the client some structured advice toward the underlying investment funds. Have you actually ever put together a proper investment strategy? Being a very simple life assurance salesman you can imagine, I didn t actually have the answer or give Tony a negative response. I now realize that not having the answer and giving him what I thought was a negative response was actually the best possible outcome for our clients and us, in that there was a serious opportunity that lay ahead. During our time together we will cover the following points: What did my business look like before the changes were made?

2 What are the questions we ask ourselves that may result in us going fee-based? What are the pitfalls? How do we start and how does it work? How do we market? What is my real life progress to date and my goals for the future? What did my business look like before the changes where made? Like many of us who have been in this wonderful profession for some years, I was and still am a sole practitioner with a small support team. The area of business that we conducted was largely as a general practitioner. My business was, like many of yours, a sole producer with one support staff and wholly dependent on new business and commission income. I was a nine-year MDRT member with only one Court of the Table appearance. What are the questions we ask ourselves that may result in us going fee-based? Within this area there are two types of questions that we might want to ask ourselves. The first type of question would be, what may be enforced upon us due to external market changes, such as the regulator imposing new rules, the insurance companies reducing our margins due to legislative changes on the way their businesses need to be run and finally, the consumer. Is there a possibility that the consumers will expect us to engage with them in a different manner to the traditional product sale and up-front commission contracts that we have been offering them for many years? So what will the future look like for us? Will the regulators really reduce and then finally abolish commissions? In the UK, yes they have, for most of the financial services business. The second type of question would be internal questions. If we are planning to stay in this business for the rest of our working lives, ideally, what kind of clients do we want to be working with? Do we really only want to work with clients who will only want a transactional

3 relationship? No! We want to work with clients who value a long-term planning relationship and who are prepared to pay for that advice and service. How do we want to be paid? I'm sure you d agree that, ideally, we want to get paid for advice right from the outset and going service, not just for implementation. And how do we remove uncertainty of income? By having a process-driven business where clients pay for initial advice and then an additional fee for ongoing process-driven servicing. So how can we increase profitability? By being paid for every step of the financial planning process. How do we create a business with a capital value? By being able to have a business that creates income from valuable processes that we don t have to get involved in on a daily basis. What are the pitfalls? Before we commence this journey, clearly it s important to be mindful of the pitfalls. Initially, we need to decide on which areas of business to go fee-based in? Why don t we break down the financial planning process and be paid for each stage. So we get paid for an initial consultation, preparing a report, and implementing investments by fee. The only area in my practice we still receive commission for is protection planning and that too is only at implementation of the product. Otherwise all other steps are paid for by a fee. Many of us would be concerned that there could be potential for short-term cash flow disruption. This was not actually the case as we phased in the fee-based advice, starting with new clients who had not dealt with us before and mature clients with large investment portfolios who would appreciate they need a maintenance program for their existing affairs. A crucial part of the jigsaw puzzle is to design a proposition that both clients and prospects find attractive and see it as worth paying for. How do we start and how does it work? Firstly, design a client-facing advice process. This advice process should be a clear communication of what the client should expect. We have to identify the component parts of the work we do for our clients:

4 1. Establish our clients short-, medium-, and long-term goals in life. 2. Work out what assets and liabilities they have. 3. Analyze and evaluate their financial status. 4. Develop a plan of action for them. 5. Implement their plan of action. 6. Monitor their plan and make necessary adjustments by reviews. Having done all the valuable work through Stages 1 to 4, traditionally we only actually get paid at Stage 5. This has never really sat well in my mind, but this was how we got remunerated for our work, wasn t it? Or is there another way? Secondly, if we are offering a monitoring and review, design a back office process in order for the work to flow systematically within our organization. Our teams need to understand clearly who is responsible for what when a client file hits their desk. Write clear processes and procedures for each part of the client journey and client-file journey that all our teams sign up too. Thirdly, how do you communicate the process to our teams? Written processes speak a thousand words. Some of our teams will need this reinforced by having a meeting with us to explain exactly how we want this new advice structure to work. Better still, we could work with our teams and have them contribute to the new way of working and documenting of the new processes. Fourthly, ongoing review processes such as investment reviews. We need to decide what platform we are going to register the client investments on, create a process for risk assessment, asset allocation, fund selection criteria, and portfolio review processes. It is essential that this is completely process driven. Fifth and finally, what do we charge for our new service? For example, fees for research, recommendations, and implementation. This is really an area where our creativity can flow.

5 There are so many different models we can adopt, and each one works if we believe it s right for our client banks and believe in it ourselves. I adopted a charging structure of a low initial meeting fee of $137. At this meeting we will discuss the clients worries, concerns, goals, and objectives, and discover the hard and soft facts that we need to know before we offer a framework to the solutions to remove their worries and concerns and achieve their goals and objectives. My goal at the end of this meeting is to have understood the clients requirements sufficiently, discussed with them a framework of solutions for their particular circumstances, and agreed on our research and reporting fee for the next part of the advice process. We then follow up with the research and writing a report. The reporting fee is $357 with the research broken into component parts of what types and how many plans we are analyzing. Typically, the total fee for this section works out to $825. We then follow up with an implementation fee, which is 2 percent to 3.5 percent of the funds being invested, or we take standard commissions for protection business, which is still currently available in the UK market place. As with any long-term client relationship, it s important to review the current affairs systematically. We charge a standard fee for systematic portfolio review, quarterly or annual investment reviews, and implementation of any changes. The fees are 1 percent p.a. of the funds under management plus a quarterly fee of $297 or annual fee of $587 depending on how often we rebalance the investments, review the asset allocation and the underlying funds for each portfolio. Over the years we have found that people tend to require one of two types of service. The first group includes those people who simply want us to put basic actions in place and then require no further advice. The second group includes those people who require an ongoing relationship regarding their financial plan. We refer to these as different relationships the customer relationship and the client relationship.

6 The Customer Relationship Customers fall into two categories. The first are those people who have a very specific idea of what they would like us to do for them. Those people, generally speaking, are very involved in their own finances and have a high degree of knowledge and competency in dealing with their own financial affairs. They do, however, recognize their limitations in this knowledge and so require specific help from us to cover specific areas. These people tend to enter a customer relationship because they want to put a single arrangement in place. Once these plans are in place, they require no further assistance. The second group of people are those whose affairs are relatively simple and uncomplicated. Therefore, it is easy to put basic plans in place to achieve their requirements. As these plans are relatively simple, they do not necessarily need monitoring or amending on a regular basis. The customer relationship is designed for those people who are generally happy to work with us on a one-off basis. Once we have put the requested plans in place, we will usually take no further action in monitoring or updating them. Customers are, however, able to come back to us at any point in the future should they require further advice, and they would be charged based on the advice required. However, in special circumstances we would contact customers if we felt there were significant changes that they should be made aware of. This advice does not go to the level of regular monitoring. The Client Relationship The relationship with clients is very different. Again with this relationship there are generally two types of people. The first consists of those people who do not feel that they have the ability, intent, or time to continuously monitor their financial affairs. They may well have the knowledge and experience to deal with their own personal circumstances but feel that these affairs are best monitored by a professional. In effect, they understand that they do not know what they do not know. The second group of people are those whose circumstances are both more complicated and involved than the usual clients or more likely to require ongoing advice and monitoring.

7 We work with clients in one of two ways quarterly retainer clients and annual retainer clients. Quarterly Retainer Clients The client relationship is very different from the customer relationship. As a client your affairs will be closely monitored to ensure that they meet your requirements. The monitoring goes further than simply reviewing the investments that you have made. Most financial plans are affected not just by market changes, but also by changes in legislation, taxation, and regulation. We therefore monitor and review these areas in line with arrangements that we have put in place for you. As the changes affect your financial plans, we will work with you to ensure that your plans are updated to achieve your requirements and goals. Instead of reviewing your portfolio annually, we will review the portfolio quarterly. We obtain your approval initially in order to then make the recommended changes. We do not operate a discretionary service, and so we always require your approval in this way before making changes to a portfolio. If you feel that you need to meet with us at any time, you can contact us to arrange a meeting. The cost of any meeting is covered in the retaining fee. As a client you will receive priority over customers regarding work that is done. In the case of managing investment portfolios, this is clearly an advantage during a time of volatile markets. It is also an advantage in the event of taxation changes that may necessitate changes to your portfolio and financial plans under a very short time scale. In addition, you will receive the common benefits noted below. The cost of this service is $297 per quarter plus 1 percent p.a. of the funds under management. The quarterly payment is paid by a quarterly standing order. The percentage charge will be deducted from your investment fund. Annual Retainer Clients As an annual retainer client you will receive an annual review. We will forward you the review together with our recommended changes and amendments. Once we receive your approval, the recommendations will be put into place. Again, we do not operate a

8 discretionary service, so we always require your approval in this way before making recommended changes. In addition, you will receive the common benefits noted below. The cost of this service is $587 p.a., plus 1 percent p.a. of the funds under management. The annual payment is made through standing order, with the percentage being deducted from the investment fund. Common Benefits Both quarterly retainer clients and annual retainer clients receive the following: A bimonthly newsletter, SmartMoney Priority over customers Full policy valuations with your review Annual no-cost meeting at your request Annual review meeting where necessary How do we market? First and foremost, we must have a simple written document that we can articulate to our clients in an easy to explain and understandable manner. The document must highlight how we and our firms advise our clients. The document and our explanation must convey the message that feebased advice is in our clients favor and for their benefit. Once we have this document and the message is clear in our minds, make the call. Explain to our existing clients that the world of financial planning is changing. Advise them of the steps and that we previously only got paid for implementing new plans for them. Explain to them that as their affairs are maturing, we really need to spend more time and effort in looking after their existing arrangements and there needs to be a maintenance program. Explaining your advice process to new prospects is much easier as they have nothing to benchmark you against. It would be easy to advise new prospects that fee-based financial planning is focused on a long-term relationship with them and reviewing their affairs to keep on

9 track to achieve their goals as opposed to a commission-based relationship, which largely relies on the sale of a product for the advisor to be remunerated rather than a fee for ongoing service. What is my real life progress to date and my goals for the future? So now that we have discussed the theory, perhaps we should share my actual progress to date and goals for the future. I started fee-based financial planning in 2007 with a career-to-date recurring income of $15,000 per annum (16 years). My recurring income from 2007 to June 2012 has increased to $225,000. My first goal is to get it to $375,000 plus 33 percent for market fluctuations equaling $500,000 per annum of recurring income. During my first 16 years in this business, having sold a number of financial products, I had accrued a meager renewal income of $15,000 per annum. During the last 5 1/2 years, through small incremental changes, bite size steps, my recurring income is now 15 times bigger. This income pays for the entire running costs of my firm, which include comfortable offices, two high quality staff, a nice vehicle for me to travel to my clients in, and a genuinely suitable retirement provision for me and my family. We actually have a business where most of its income comes by way of clients who pay for the relationship of financial planning and the process of investment management, not by product sales. As for the future, I expect to have a process-driven business where my role is simply a function of business oversight and client-facing advice and highly profitable. Conclusion The three transferable ideas you will get from our journey are: Firstly, we can prospect up market using fee-based financial planning as there are plenty of existing clients and new prospects out there who understand the difference between commissiononly and fee-based advice.

10 Secondly, we must create a full advice system and investment process that works with those clients giving them peace of mind that their affairs are being reviewed in a systematic manner. Thirdly, we can create a predictable and profitable business with an income stream that will transform our client relationships, our cash flow, our lifestyles, and ultimately our peace of mind.