Transitioning to a Fee- Based Financial Planning Practice Toolkit. Phase One - Planning

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Kory Jennings
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1 Transitioning to a Fee- Based Financial Planning Practice Toolkit Phase One - Planning

2 Contents Request for comment... 3 Mind-set change... 4 Traditional Adviser Model... 5 Progressive financial planning... 6 Some advantages of transitioning... 7 Fee charging methods... 8 Advantages and disadvantages... 8 Best practice... 9 Understanding your business Identifying stakeholders Skills assessment SWOT analysis Cost to serve Client segmentation Understanding your client s value Developing the best service methodology for particular clients Ideal client profile Client segmentation process Client value proposition Service menus

3 Request for comment This toolkit was prepared through research done by FPI. We consider this toolkit to be of high quality and a complete guide to assist members with transitioning to a fee-based financial planning business. We feel that the toolkit can be applied in a tied and independent advisor space equally. We are committed to updating the toolkit on a regular basis to ensure that it continues to reflect best practice and will be guided by member s practical experience in implementing the toolkit. Therefore we welcome comments from our members, which will be used in assessing the toolkit s ability to be implemented. Please submit your comments to technical@fpi.co.za. Kind Regards David Kop, CFP Head: Advocacy and Consumer Affairs 3

4 Mind-set change Albert Einstein has been credited with says The definition of insanity is doing the same thing over and over again and expecting different results. While there is some dispute as to whether he actually said this, the sentiment is very applicable in transitioning to a fee-based financial planning business. The transition is not just about how clients will be charged, but rather how clients will be serviced. The reality is that you cannot just change your charging method and expect this to be accepted by clients. You will have to change the way that you engage with them. The important question to answer is why you are undertaking this transition. It should not be something that is done because the proposals contained in the Retail Distribution Review (RDR) will force it upon your business, but rather something that has been internalised by you and your staff. In this process some questions that you need to bear in mind are: What does my ideal client profile look like? How can I provide services that meet my client s needs? In what ways am I different? How will my clients view the change in my charging methodology? How can I best leverage my qualifications and CFP designation What type of support structures do I need? What systems and strategic alliances will I have to support my business? This toolkit has been designed to assist in answering some of these questions. The way that your client engagement may need to change is graphically represented in research commissioned by Brookes Macdonald and undertaken by Rotation Consulting, entitled Increasing the Value of your Financial Planning Business 1 and is reproduced below with permission

5 Traditional Adviser Model 5

6 Progressive financial planning 6

7 Some advantages of transitioning Having spoken to South African business that have transitioned to fees and looking at international feedback some of the advantages of a fee based business are: You are paid for advice not the selling of products. Revenue does increase, though may take some time to do so. An annuitised income stream provides for less fluctuations in income, and provides a business that can easily be valued for resale purposes. You are able to position yourself as a professional within the industry and will clients. Providing more streamlined business processes allows you time to service existing clients. Client loyalty increases. 7

8 Fee charging methods There are four methods of charging fees outlined in the table below Method Percentage of Assets under Management (AUM) A fee for service A retainer An hourly rate Comments The financial planner may charge a percentage of assets as an initial fee, and then and ongoing fee expressed as a percentage of AUM The financial planner would list the services they provide and these services would be performed at a fixed fee for that service The client signs a debit order and a (normally) monthly retainer is charged The financial planner would prepare a quote before preparing any advice and bill the client for the hours Advantages and disadvantages Implementing a fee-based practice is not a one size fits all, and may not even be the solution for all clients. Many clients may prefer to stay on a commission structure as this will enable them to at least access financial advice. The advantages and disadvantages are discussed below. Method Disadvantages Advantages Percentage of Assets under Management Financial planners income linked to market performance Financial planner s income will increase as markets rise (AUM) Focus is on asset management Easy to explain to a client and the other aspects of financial planning may be ignored No need to install fee collection processes as the fee is collected from the investment Exposed to competition from holistic financial planners Already in place with collective investment schemes A fee for service Risk of mis-quoting borne by No conflict of interest the practice Risk of non-payment for services rendered A retainer Harder to come to an amount May not collect fees even though service rendered Will need to set up collection mechanisms An hourly rate Can rewards inefficiency Only so many hours a month that can be billed May be more difficult with new clients Need to develop systems to track bill and collect fees Encourages efficiency Limited scope for dispute based on fees as all parties will be aware of the fee and the service Business planning easier as can annuity income will be built Fewer potential conflicts with clients Simple to explain Financial planner would need to get to know the client upfront before quoting High value placed on financial planning services 8

9 Best practice Best practice would imply that a practice should not stick to only one fee method but employ a variety of fee methods, including commission depending on the needs of the client. For example a financial planner could set a fee for risk cover analysis at R 3,500. However should the client accept the proposal and the financial planner implement the risk product, the commission earned would offset the fee. Another example could be where a financial planner charges an hourly rate for doing an investment analysis, as well as an AUM fee if the product is implemented with the financial planner. 9

10 Understanding your business The starting point of the transition planning is to understand your business and document your findings in a business plan. We have already published a guide to drafting a business plan entitled Elements to consider when starting a practice and putting together a business plan, and will not be covered in this guide. This document can be found on the practice management section of our website. Identifying stakeholders The change in the way that you do business will not only affect you but other stakeholders as well. It is key to identify these stakeholders and determine what they may want to get out of the transition, and more importantly how they can help you. The stakeholder that you need to consider are: The owners or shareholders Employees of the business The clients of the business Product suppliers Strategic partnerships. Worksheet one Stakeholder Identification can be used for this exercise. The question posed are by no means exhaustive and the sheet can be adapted as needed. Skills assessment Performing a skills assessment on yourself and your staff will help identify areas of training, both upfront and ongoing. It will also help you identify areas that you may need to bring in outside assistance. Worksheet two - Skills Assessment provides a framework for this analysis. The data in the sheet is for illustrative purposes SWOT analysis A SWOT analysis is a structured planning method used to evaluate the strengths, weaknesses, opportunities and threats involved in a business venture. It involves specifying the objective of the business venture and identifying the internal and external factors that are favourable and unfavourable to achieve that objective. Strengths and weaknesses are aspects that are internal to the organisation, thus when analysing them one looks inward. Opportunities and threats are external and environmental factors that need to be considered. Worksheet three SWOT Analysis provides a framework and some guidance questions to be considered. Cost to serve The most often asked question by financial planners considering the transition is what should I charge? In order to determine what fee to charge there are two factors that need to be considered, what you do for clients and how much it costs you to do it. Process In order to determine the costs you would need to document the process that you go through with a client. 10

11 Worksheet four Process Flow provides a template for documenting your processes. It has been populated with the processes for taking on a new client. This should not however been seen as a recommended process, but merely to illustrate the principle. With all processes finalised and time allocations understood the next step would be to determine the cost of the service. The steps for this would be: 1. Determine the annual overheads for the business. 2. Determine the number of work hours in the year. 3. Apply that to the time taken to complete a process. This information can then be entered into the Cost to serve Calculator to determine a fee for the service. 11

12 Client segmentation Client segmentation is key to ensuring a successful transition as this will help you understand your client and their value to your business. The benefits of client segmentation are: Understanding your client s value Now that you know the cost of the service that you provide it is key to measure against what you are doing for your clients and what you are reviving as compensation. Segmenting your client base will help you identify which clients are providing value to your business and which are costing you money. Developing the best service methodology for particular clients Appropriate service models provide an excellent system for scheduling client reviews and client communications. This will allow you to have consistent contact with your clients and may lead to new opportunities as the relationship and trust grows. While it is important to give all clients excellent service you will be able to tailor make service packages for your more valuable clients. Ideal client profile After segmentation and analysis of your client base you may identify some trends which will help you identify your ideal client profile. Having an ideal client profile is a powerful tool. That way when a client wants to refer someone to you they will know what kind of person you like to work with and you will get a quality referral. It is therefore important not only to keep your ideal client profile to yourself, but share it with your clients who regularly refer. Client segmentation process Client data The starting point of the process is together your client data. You will need data from a qualitative and quantitative perspective. Quantitative data required Recurring revenue this is not any upfront or once off revenue but what you can expect from the client annually. Assets Under Management In the absence of knowing your clients recurring revenue, this may be one indicator of value of the client. Total investible assets - this information is important as it will allow you to assess the client potential. One of the question you also need to consider is, if you are only managing a small portion of your client s investments, why? Annual income Again this could be an indicator of potential Other assets knowing what other assets a client has could lead to opportunity in other areas such as Estate Planning. While it is important to consider whether a client is adding to your profit line it is also important to analyse the quality of the relationship. This will indicate how loyal the client is to you. In addition a client who may not provide a high income, may refer many valuable clients to you. That client would need to receive differentiated service. 12

13 Qualitative data required Implementation You need to consider if a client always implements your recommendations. This would be an indicator of the level of trust they have in you. Referrals research has shown that when client select a financial planner a recommendation from friends or families is one of the most important factors. You therefore need to know if a client is regularly refereeing other clients to you and manage that relationship. Potential You need to analyse a client in terms of future potential. Having additional investible assets or a large income is an indicator of potential. Ease of service the ease of servicing a client is an important factor to consider. While you may earn a high revenue from a client they may still not be profitable. This is therefore an important consideration. Analysis The Segmentation Tool spreadsheet available for download, provides a tool for taking data from your CRM program and analysing it against these factors. Quantitative Analysis The qualitative analysis ranks your clients into four tiers based on the value of their recurring revenue as follows: Tier 1 Top 20% of clients Tier 2 Next 20% Tier 3 Next 20% Tier 4 bottom 40% Qualitative Analysis The qualitative analysis allows you to rank the clients according to a relationship score. In order to determine the relationship score you would rate each client as follows: Factor Score 1 if Score 0 if Implementation Client implements recommendations Client does not often implement all recommendations Referrals Client regularly refers leads Client does not refer leads Potential Client revenue has potential to grow, either due to income or other investible assets or anticipated change in circumstances Client revenue does not have potential to grow. Ease of service Client is easy to service and does not demand services over and above the agreed services Client is difficult to service and takes additional time The ultimate aim of the analysis will be to understand your client base and build an ideal client profile. 13

14 Client value proposition A value proposition is a promise of value to be delivered and acknowledged and a belief from the customer that value will be delivered and experienced. 2 A value proposition explains how your service solves customers problems or meets their needs(relevancy); delivers specific benefits that are valued by the client (value); and tells the ideal customer why they should deal with you and not from the competition (unique). Before drafting your value proposition it will therefore be important to understand who you client is, hence the need for client segmentation and developing an ideal client profile. You will then need to articulate how you can uniquely meet their needs. So how do you write a good value proposition? Language - The first step is to look at your business from your client s perspective. You should not be describing your business as you see it, but how clients will see it. To do this you need to use the right language. Do not used technical jargon, but emotive words that will speak to your clients. This means that you will not draft your value proposition, your clients will. You will need to speak (survey) your existing clients to see why they work with you. Be yourself - your value proposition needs to be unique. If it sounds the same as everyone else s there will be no reason for a client to deal with you Be clear and concise a good value proposition can be read and understood in 5 seconds Provide results and benefit - the benefit that a client will get needs to be clear and notable Recommended reading Is 2014 Pershing released a research paper titled What do top advisors say and what do investors really think? Click here to download the paper. This provides really good guidelines from a client perspective. Worksheet five - Value proposition provides a sample survey that can be used with existing clients. 2 Wikipedia 14

15 Service menus After client segmentation, placing them in tiers surveying clients as to what services they value, you can build service menus for the different tiers. A sample menu may look like this: Service A B C D Face to face review Mailed report Advisor access Seminars Appreciation event Newsletter Other Plan folder Leather file Canvas file Binder n/a Christmas card Handwritten Handwritten Printed Birthday card Handwritten Handwritten (Target) Gifts Targeted 15

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