Why and how advisors move to a fee-based business

Key takeaways

• Many advisors improved the profitability and sustainability of their practice by transitioning their brokerage clients into a fee-based advisory business.
• Clients want more financial planning services and more of their advisor’s time, and they are willing to pay for it.
• We offer guidance to help you decide whether a fee-based model is right for your business and how to prepare for a smooth transition.

Fee-based advisors have more opportunity to grow

Advisors who have transitioned from a transactional to a fee-based business have given themselves more time to pursue bigger and better growth opportunities. Instead of spending all of their time searching for prospects and closing sales to earn the day’s commissions, they invest their time in their business while earning an ongoing fee based on client assets. A fee-based advisor can choose to manage client portfolios on their own, but most prefer to use home office or third-party models or SMAs as the streamlined investment process consumes less of their time.

By unlocking their time, fee-based advisors can provide more services to their clients. Expanding their service offering deepens their existing client relationships and helps them attract bigger clients, leading to increased assets and stronger revenues. It also attracts next-generation talent as more services create more opportunities for team members to interact with clients and broaden their careers. And the greater predictability and stability of fee-based revenue makes it less risky to hire more staff.

Fee-based advisors also have more time for networking and exploring new ways of prospecting through social media. They can be more focused on the future. For example, they can prepare for the great generational wealth transfer by forging relationships with their clients’ spouses, children, and grandchildren.

The bottom line is that fee-based advisors have more opportunity to grow a sustainable, profitable business than advisors who spend their time soliciting individual transactions. All of these growth opportunities – expanded services, deeper client relationships, increased assets, teams of next-gen talent, revenue stability, and preparedness for the future – lead to higher valuations for a potential M&A or succession.

Commissions are a diminishing source of advisor revenue

Advisors across the industry are sourcing more of their revenues from asset-based fees in lieu of commissions. The key driver of this trend is likely the greater opportunity for fee-based business growth, but if that isn’t enough to compel a brokerage advisor to make the change, the secular evolution of the financial advice industry likely will.

Investors have access to more information than ever, and those who want transaction services can usually achieve greater cost-efficiency using a robo-advisor. At the same time, advisor clients are demanding more services, which suits a fee-based pricing model. In 2022, more than 70% of advisor revenue was comprised of asset-based fees, and advisors project that commissions will continue to decline by 25% over the next two years.

Most clients don’t object to paying a fee

The BlackRock Business Consulting team has worked with many advisors who successfully transitioned clients from brokerage to fee-based accounts. While advisors are generally apprehensive about discussing fee changes with clients, they most often find that clients welcome the new pricing model. The reality is that clients prefer the transparency and simplicity of a flat-fee structure versus a complicated commission schedule, and they want their advisors to provide them with more services.

Most investors recognize the value of financial advice and they are willing to pay for it. In fact, investors with more assets are even more likely to be willing to pay for advice.

Most clients are willing to pay for advice
Investors’ agreement that they are willing to pay for advice

Is fee-based pricing right for your business?

Fee-based pricing may help you drive stronger business growth, but it isn’t appropriate for every client. Brokerage accounts make sense for clients who trade only a few times a year or have no interest in your financial planning services. A fee-based approach is usually the better option for clients who want more of your time and ongoing advice – and chances are many of your brokerage clients want more services and may be unaware of what you can do for them. And so, the question before you is: What do you want for your business and your clients? Here are some ways to think about your decision:

• Go back to your business plan. Would a fee-based pricing model be consistent with your growth strategy?
• Consult your home office manager, a business coach, or advisory board if you have one. Chances are there is someone who can help you determine what is best for your clients and your practice.
• Talk with advisors who have already made the transition. Ask them what worked well and what they would do differently given their experience.
• Perform a revenue analysis. How would a fee-based model impact your profitability and the value of your business in the long run?
• Evaluate non-revenue benefits, such as the ability to attract young talent and having more time for prospecting and strategic planning.
• Socialize the idea with your team. Ask for their feedback and make them part of the decision.
• Ask a couple of your top clients how they would view the change. Make note of their questions as this can help you prepare for client conversations more broadly if you decide to move forward.

Once you’ve done your due diligence, evaluate the pros and cons of transitioning to a fee-based model and make the decision that aligns with your long-term goals and vision for your business.

Revisit your value proposition

If you decide to make the transition, the first thing you need to do is revisit your value proposition. Your clients will likely not mind paying a fee as long as it is justified. Consider how your clients’ experience will be different after the transition. (This could be an opportunity to completely reinvent your service offering and reinvigorate your business.) Adjust your value proposition to clearly articulate the benefits of working with you and your team. Involve your team in the process and ensure everyone is aligned on the narrative and how it will be communicated to clients.

Create a transition plan

Having a detailed project plan helps ensure a smooth transition for your team and your clients. Outline the steps you will need to take and establish a timeline. Communicate your plan to your team, ask for feedback and address concerns.

Consider taking a phased approach to the transition versus moving all your client accounts at once. This allows you to address any unexpected issues you encounter with the first batch before you roll out the next, and it allows more time to answer your clients’ questions and lead your team through the change. Additionally, a gradual transition to your new pricing model reduces the short-term impact to your cash flows as you shift from commissions to fee-based income.

We recommend preparing and testing the logistical implementation of account changes before you begin communicating the transition to clients. This allows you to extend your timeline if you are met with complications.

Work through the logistics

1. Consult your legal and compliance advisor to ensure your licensing and filing requirements are satisfied.
2. Discuss with your team the mechanics of implementing the changes in your information systems, and prepare for the necessary adjustments to your teams’ processes. Bring in the people who have the expertise you will need.
3. Notify third-party service providers (custodians, broker-dealers) of the anticipated account changes and provide a timeline. Ask how the transition will impact their processes and what they need from you to prepare.
4. Test the technology. Transition one of your own small accounts and look for any potential conflicts or gaps in your processes.
5. Share your learnings with your team. Discuss any concerns and explore solutions that may help avoid confusion or improve efficiency.
6. Review your client accounts. Analyze the potential impact to each client’s portfolio. If you intend to use home office or third-party models or SMAs, consider the impact of any concentrated stock or sector positions among your clients’ legacy holdings. *TIP: The account review can be an opportune time to ensure all of your client information is up to date.
7. Select the accounts you plan to transition in the first batch. Consider the complexity of the current portfolio and your relationship with the client.

Discuss the transition with your clients

Some advisors communicate the transition to clients during their next review, while other set up a special meeting. Document your discussions with clients about changes to your fee structure.

As you prepare for your client conversations, remember to focus on your value, be transparent and be confident.

• Focus on your value. Be clear about your value proposition and what you do that is different from your peers. Explain how the change is going to benefit the client and their family, particularly that it will allow you to spend more time with them and provide more services. Walk them through an inventory of your client experience and emphasize how it creates a partnership between you.
• Be transparent. Clients want to talk about fees. They want to understand what they are paying for. Clearly outline your fee structure in detail. Explain why you are making the change now, which should relate to your refreshed value proposition. Your clients will appreciate your transparency and it will reinforce their trust in you.
• Be confident. The message you are delivering is not likely to surprise your clients. They want more of your time and you need to be compensated accordingly. Clients want you to be available to answer their questions and help them plan for their future. The transition to fee-based advisory services gives them exactly what they want – a relationship that goes beyond the portfolio. You will be their partner who understands their financial goals and provides the services they need.

Ensure ongoing success

Once you’ve had the transition discussion with your first batch of clients and the account changes have been implemented, reflect upon what worked well and what could have been smoother. Ask your clients for feedback and discuss it with your team. Adjust your process before you transition more clients.

Monitor the new portfolios and periodically review the fee structure to ensure both continue to be aligned with the client’s evolving financial goals.

BlackRock can help

Transitioning from a brokerage to a fee-based business takes a lot of work, but you owe it to yourself, your team and your clients to explore the idea. While the growth trajectory for a transactional business is limited, the efficiency of a fee-based business opens the door to more growth opportunities and greater potential to increase the value of your business.

The BlackRock Business Consulting team can help you grow your business. Contact your BlackRock representative to learn more.

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