Financial advisors who are contemplating switching to a fee-based model in light of the enhanced cost disclosure and performance reporting coming into effect with the second phase of the client relationship model (CRM2) may be concerned about their clients’ reactions to this information.

However, a new study conducted in the U.S. by Oaks, Penn.-based SEI Investments Co. suggests those fears may be unfounded.

The study, entitled Fees at a Crossroads: Adopting an Advisory Fee Model that Reflects Your True Value, found that advisors in the U.S. who switched to a fee model based on assets under management (AUM) from compensation based on commissions experienced a client retention rate of 90%.

However, advisors making any kind of transition in fee structure remain rare, the study found, given that 61% of survey participants said they have not changed their fee structure in more than five years, with two-thirds of these individuals saying they have not made a change. Among the advisors who have made a switch, 34% said they moved to a fee-based model from commissions.

One of the reasons why advisors may be hesitant to change their fee structure is because they foresee an uncomfortable conversation with their clients.

“Everyone is terrified of bringing up the fee discussion,” says John Anderson, managing director, practice management solutions team, for SEI’s advisor network. SEI’s study found that almost 75% of investors in an earlier survey said they never or seldom discuss fees with their primary advisor.

Yet, those conversations are the likely reason for high retention rates when switching fee models, Anderson says. That’s because advisors who make an effort to understand the services they provide to clients, and at what price, typically have no problem explaining to clients the value of their advice.

Says Anderson: “When you have that confidence, I don’t think there’s any question that clients are going to follow your lead.”

April-Lynn Levitt, business coach with The Personal Coach in Oakville, Ont., says advisors who change their fee models successfully do so by thinking carefully about their business and how they want it to operate.

“The biggest thing, really, is sitting down and defining your value,” says Levitt, “so that you’re confident in the value that you’re adding for clients.”

Although an overall move toward the fee-based model may be slow, research from Toronto-based PriceMetrix Inc. suggests that fee-based accounts are becoming more prominent in advisors’ books.

According to a PriceMetrix report released in 2015, fee-based assets made up 35% of the average advisor’s book of business in North America in 2014, up from 31% the year before. Moreover, 53% of advisors’ revenue came from fees in 2014.

Similarly, research from Investment Executive’s 2015 Report Card series found that fees – in the form of fee- and asset-based revenue – account for 46.7% of the average advisor’s revenue (regardless of advice channel). That figure is up from 40.1% in 2014 and up significantly from 32.4% in 2008.

This shift is happening in Canada, the U.S. and abroad, says Mario Addeo, executive vice president and head of private client solutions with Toronto-based Raymond James Ltd.’s private-client group: “That’s where the industry is going. When you look at the business, as a whole and globally, you have countries such as the U.K., Australia, South Africa and India [that have] gone to a fee-based, non-commissioned structure.”

Given the way the investment industry winds are blowing, Raymond James is focusing more on fee-based models. Currently, about 72% of Raymond James’ AUM has recurring revenue. Of that, about two-thirds is in mutual fund trailers. The remaining third is divided among several fee-based options, including third-party separately managed accounts and discretionary account management.

Discretionary account management is a particular focus for Raymond James, with roughly 13% of its AUM held in such accounts, up from 3% five years ago. In order to help more Raymond James advisors adopt these fee-based models successfully, the firm has increased its discretionary portfolio-management support and communication training.

“I know advisors are fearful of the opportunity [ to switch to fee-only compensation],” Addeo says, “but we have been spending a lot of time with practice management, with coaching, with communication, and getting [advisors] to be able to articulate their value-add proposition.”

Just as Raymond James uses several fee models, SEI’s study also found other opportunities besides the AUM fee model to move away from commissions. For example, there are hybrid models involving a percentage of AUM and a flat fee for initial financial planning work; or a quarterly retainer fee.

These hybrid options allow advisors to drop their asset-management fees – thereby remaining competitive with low-cost, automated services such as robo-advisors – and to be compensated for the specific advice and services advisors provide to clients rather than for a portfolio’s performance, Anderson says.

The uptake of such fee structures still is less than for a straight AUM model, according to SEI’s research, with 26% of American advisors using a fee-for-service hybrid and 9% having adopted a retainer hybrid.

However, Anderson believes these options will gain ground as regulators tighten rules on how advisors advise clients and are compensated, whether via implementation of a fiduciary standard or by banning of trailer fees.

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