Slow transition to a fee-based practice could hamper long-term revenue growth, planners told

There may be obstacles in moving from a commission-based to fee-based practice, but financial advisors could benefit from making the transition sooner rather than later, a panel of industry experts said on Tuesday.

At the Canadian Institute of Financial Planners’ annual national conference in Halifax, speakers said financial planners who adopt a fee-based platform could boost revenues and remove biases that are inevitable with commission-based fee structures.

“I think there’s a lot that can be done in terms of purposeful, holistic planning,” said John DeGoey, vice-president of Burgeonvest Securities Ltd. “Once you can do that, you can likely earn more money than you would make if you were with a commission-based advisor.”

But there are numerous obstacles to making the transition, the panelists said. The top three are how to set fees, where to start transitioning with current clients and a drop in revenue, according to a survey of advisors conducted by To Fee Or Not To Fee, an organization that assists advisors in transitioning to a fee model.

As a result of these and other obstacles, many advisors tend to put off the formal transition and instead make the adjustment in a gradual manner, said Marc Lamontagne, a financial planner who runs To Fee Or Not To Fee. He pointed out that roughly half of the advisors surveyed made the change very slowly, transitioning fewer than three clients a month on average from commission to fee-based structure.

“They’re not in a hurry to transition fees,” Lamontagne said. “What they tend to do is to try it out slowly. They’ll start with trying out different fee types.”

By easing the pace of the transition, the advisors experienced a less drastic drop in revenue as a result of the transition, according to the survey. More than a quarter of advisors surveyed said they did not experience a drop in revenue, and nearly as many said the decrease was negligible.

But Lamontagne warned that making such a slow transition could hamper the long-term potential revenue growth for advisors. His research shows that advisors who develop a formal transition plan tend to make the change more rapidly and ultimately generate higher earnings.

“Those that did have a formal transition plan tended to make a lot more money, on average, than those that don’t,” said Lamontagne.

DeGoey agreed that making a quicker transition could be beneficial for advisors. He said since a period of reduced revenue is commonly associated with the transition, it may be more difficult for advisors to incur later in their career.

“Do it as soon as possible,” he said. “Once you’ve grown accustomed to a lifestyle associated with a certain revenue stream that’s associated with a certain business model, it will be that much harder to forego it.”

DeGoey added that with many clients adjusting their financial plans as the financial crisis takes its toll, the current environment presents an opportunity for advisors to make the transition.

“I think this is a good opportunity for those people who want to embrace that,” he said.

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