Why and how advisors move to a fee-based business

Transitioning brokerage clients to an advisory fee structure may improve the profitability and sustainability of your business. Determine if a fee-based pricing model is right for your business and learn how to implement the change while creating a smooth transition for your clients.

Commissions are a diminishing source of advisor revenue

Advisors across the industry are sourcing more of their revenues from ongoing fees based on client assets in lieu of commissions. The key factor for this trend is likely the greater opportunity for fee-driven business growth. Advisory clients are demanding more services, which suits a fee-based model, while transaction-oriented investors can usually achieve greater cost efficiency using a robo-advisor. 

In 2024, more than 72% of advisor revenue was comprised of asset-based fees, and advisors project that commission revenue will continue to decline by 27% over the next two years.

Asset-based fees are projected to increase at the expense of commissions
Revenue sources 2024 vs 2026 estimates

Fee-based advisors have more opportunity to grow

Soliciting individual transactions and closing sales to earn the day’s commissions takes a lot of time that could be spent pursuing bigger and better growth opportunities. In contrast, fee-driven advisory businesses often use home office or third-party models or separately managed accounts (SMAs). Having a streamlined investment process frees up time for advisors to provide more services to their clients and focus on driving business growth.

Providing more services can help you deepen existing client relationships and attract bigger clients, leading to increased assets and stronger revenues. Additionally, a broad set of services is attractive to next-generation talent as it provides more opportunities for client interaction and career development. The greater predictability and stability of fee-based revenue makes it less risky to hire more staff.

Fee-based advisors have more time for growth-driving activities such as networking and prospecting on social media. They can invest time in the future of their business by meeting with wealthy families and forging relationships with their clients’ spouses, children and grandchildren.

The bottom line is that moving from a transactional to a fee-based pricing model can provide more opportunity for you to grow a sustainable, profitable business, which can lead to a higher valuation for a potential M&A or succession.

Most clients welcome a flat-fee structure

You might feel apprehensive about introducing fee changes to your clients, but the reality is that most clients prefer the transparency and simplicity of a flat-fee structure versus a complicated commission schedule, and they want their advisors to provide more services. They recognize the value of financial advice and they are willing to pay for it. Clients with more assets tend to be more willing to pay for advice.

Clients are usually willing to pay for financial advice
Investor agreement with the statement: “I am willing to pay for advice.”

Is fee-based pricing right for your business?

Fee-based pricing is not appropriate for every client. Brokerage accounts make more sense for clients who trade only a few times a year or have no interest in financial planning services. However, your brokerage clients may want more services and they may be unaware of what you can do for them. Therefore, 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?
• Perform a revenue analysis. How would a fee-based model impact the profitability and value of your business over the long run?
• Evaluate non-revenue benefits. How could you benefit from allocating more of your time to growth-driving activities?
• Seek advice. What does your home office manager, business coach, or advisory board think is best for your clients and your practice, and why?
• Talk with experienced advisors. Ask advisors who made the transition to share their experience. What worked well? What would they do differently?
• Socialize the idea with your team. Make your team part of the decision. What feedback or concerns do they have?
• Survey your top clients. Ask a few of your best brokerage 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 changing your pricing model. Make the decision that best aligns with your long-term goals and vision for your business.

How to implement a fee-based pricing model

1. Revisit your value proposition

If you decide to make the transition, the first thing you need to do is revisit your value proposition. Consider how your clients’ experience will be different after the transition and adjust your value proposition to clearly articulate the benefits of working with you and your team. 

This could be an opportunity to completely reinvent your service offering and reinvigorate your business. Involve your team in the process and ensure everyone is aligned on the narrative and how it will be communicated to clients.

2. 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 their concerns.

Prepare and test the implementation of account changes before you communicate the transition to clients. This allows you to extend your timeline if you are met with complications.

• Consult your legal and compliance advisor to ensure your licensing and filing requirements are satisfied.
• 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.
• 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.
• Test your implementation process. Transition one of your own small accounts and look for any potential conflicts or gaps.
• Share your learnings with your team. Discuss any concerns and explore solutions that may help avoid confusion or improve efficiency.
• 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 concentrated stock or sector positions among your clients’ legacy holdings.
• Select accounts to transition in the first batch. Consider the complexity of the current portfolio and your relationship with the client.

Rather than transitioning all your client accounts at once, a phased approach allows you to address any unexpected issues you encounter with the first batch before you roll out the next, and you will have 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.

3. Discuss the transition with your clients

Meet with clients before you transition their accounts to explain the rationale and impact of the changes. Focus on your value, be transparent and be confident. 

• Focus on your value. Be clear about your value proposition and what makes you different from your peers. Explain how the change will benefit the client and their family, and emphasize that it will allow you to provide them with more services.
• Be transparent. Clients want to know what they are paying for. Clearly outline your new fee structure and share the rationale. Explain why the change is happening now and how that relates to your refreshed value proposition. Your transparency 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. The transition to fee-based advisory services extends your relationship beyond the portfolio. You will be the partner who understands their financial goals and addresses their needs.

4. Ensure ongoing success

Once you’ve discussed the transition with your first batch of clients and the account changes have been implemented, assess 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 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

The BlackRock Business Consulting team has helped thousands of advisors, teams and firms grow their business. Ask your BlackRock representative for more information or explore our online resources.