Curated thoughts, relevant ideas, and significant news

No ‘one-size-fits-all’ when switching a financial advisory practice to fees: Special to The Globe and Mail

More financial advisors are moving to a practice focused on fees not only because of the erosion of commissions on financial products that’s squeezing profit margins, but by an increasing demand from investors seeking advice on increasingly complex portfolios and do-it-yourselfers who want a second opinion.

A recent study from Boston-based asset and distribution analytics company Cerulli Associates shows three-quarters of investors who use advisors prefer a fee-based arrangement. Cerulli’s research also reveals that the percentage of assets managed under a fee-based arrangement rose to 45 per cent from 26 per cent in the United States between 2008 and 2017. The trend is expected to continue as advisors “increasingly position themselves as clients’ partners in pursuit of long-term goals rather than transaction facilitators.”

As fee-based arrangements become increasingly popular, advisors must choose what type of fee-based practice to provide. Options range from a flat fee for advice to charging a percentage based on assets – or a mix of both.

“There is no one-size-fits-all approach,” says Norm Trainor, president and chief executive officer of the Covenant Group in Toronto, which provides coaching to advisors on how to grow their business.

Advisors who have adopted a compensation structure focused on fees provide big-picture financial advice and help manage a client’s portfolio as well as relationships with other wealth-management professionals, such as lawyers and accountants, he adds.

“[Investors] need someone to bring that all together,” says Mr. Trainor. “Typically, if an advisor is quarterbacking those relationships, it’s fairly time intensive. The fair-exchange of value isn’t in the risk-management or investment products, it’s in the formulation of the plan and the implementation of the plan. And so, it makes sense to charge a fee because that work is extremely valuable.”

Jason Heath, an advice- and fee-only certified financial planner at Objective Financial Partners Inc. in Toronto, charges his clients an hourly fee or flat dollar amount and doesn’t recommend financial products or receive commissions. He prefers the objectivity of this model.

“When I give advice to a client, it’s based solely on my opinion, based on what’s the best advice for them and personalizing it based on their financial situation,” Mr. Heath says. “I never have to worry about looking clients in the eyes and feeling like I’m giving them an honest answer. No biases. No conflicts of interests. I don’t accept referral fees; 100 per cent of my income comes directly from my client and it’s predetermined in advance. I think that’s pretty cool in an industry in which there are a lot of conflicts of interest.”

Furthermore, the increase in do-it-yourself investing through online discount brokerages and robo-advisors has investors hungry for independent advice, Mr. Heath says. “Just because they manage their own investments doesn’t mean they have all the answers.”

In addition, some investors also want a second opinion on what their advisors are recommending – particularly as investing has become more complex. “There is more demand for [financial] planning now than ever,” Mr. Heath says, citing the baby boomers who have accumulated assets, looking to retire on their nest egg and figure out ways to pass it down to the next generation.

“It’s more than just picking the right mutual fund now,” he says. “It’s tax and estate planning, when to start pensions, how to draw down on assets.”

Vela Wealth Management in North Vancouver has three revenue streams from the services it provides: fixed-fee financial planning, an annual retainer and commissions from products such as insurance that clients purchase through the firm.

“Fee-only makes sense when someone just wants a plan – and to make sure it’s on track,” says Jason Boudreau, Vela’s principal and founder.

The goal of Mr. Boudreau’s firm is to be more involved in the execution of the financial plan, including product implementation, and to build an ongoing relationship with clients.

“We are big on charging based on complexity,” says Mr. Boudreau. “We feel our intellectual capital – our knowledge, our experience, our expertise, our connections – is what we are able to leverage highly for our clients. The more complex the situation, the greater that intellectual capital is required.”

Regardless of the model advisors adopt, Mr. Trainor says they must be transparent with clients about how they generate fees. “Transparency is critical. The client has to understand it and it has to be agreed upon up front.”

Advisors making the switch to a fee-based model should also communicate the move clearly to existing clients – including why they’re worth the money.

“You can’t just say to your client one day, ‘You know that work we’ve been doing these past years? Now I’m charging a fee for it,’ ” Mr. Trainor says. “There has to be a demonstrated value that you’re bringing over and above what you’ve done historically. People often understand there’s a price attached to that … People will be willing to pay when they feel they’re getting value.”