UNDERSTAND YOUR MOTIVATION
Ryan Shanks, CEO of Finetooth Consulting in Longmeadow, Massachusetts, says advisors
should first consider the nonfinancial reasons behind their decision. Do they want
independence? Do they want the ability to charge fees for financial planning? What is it that
they are missing in their current model, and what would make them happier? “If you do it
based upon all the right reasons, the financial rewards follow,” he says.
Advisors also need to view the transition from the clients’ perspective, says Shannon Reid,
CRPC, vice president of Raymond James private client group education and practice management group in St. Petersburg, Florida. Commission-based compensation is transactional
in nature, she notes. If you’re going to start charging fees, what value will you add to the
relationship to justify those fees? How will you define the value proposition you intend to
deliver to fee-based clients?
FORECAST YOUR FINANCES
Detailed income and expense projections are essential because fee-based cash flows’ timing
differs from commission earnings. Should you decide to give up commissions completely,
there will be a lag from start date to your first payments. Reid describes this as a transition
from a fairly steady stream of commissions to “lumpy” quarterly fee-based payments. “You
can’t go out and sell something to raise revenue in the short term,” she says. “You have to
plan for it.”
Brandon Grundy, CFP, founder and principal with Ridgeview Financial Planning in Santa
Rosa, California, was working 100 percent on commission when he started contemplating the
fee-only model in 2008. He reviewed his client roster to project which clients would follow
him. While he was optimistic about the long-term outlook for starting his own registered
investment advisor (RIA), he anticipated his income would fall by about two-thirds in his
first year and began building up his savings cushion.
He left his former employer in August 2014 and dropped his insurance licenses. His
detailed financial projections proved to be accurate as was his forecast of which clients would
stay with him. The new business model allows him to offer hourly planning consultations,
which he couldn’t provide previously, and those engagements generate additional fee income
and bring in new clients. Overall, he’s very satisfied with his first 18 months’ results.
Grundy left under an onerous noncompete clause that slowed his startup. In contrast,
David Shotwell, CFP, a principal with Shotwell Rutter Baer Inc. in Lansing, Michigan, faced
fewer restrictions and a smaller impact to his income from transitioning to fee-only. His noncompete restrictions covered roughly half his clients and less than 20 percent of his income
was from commissions. Like Grundy, he ranked clients’ likelihood of following him and he
projected the transition’s impact on his personal finances. The results indicated he would
have to cut back on personal spending for about six months but after that his income would
return to its prior level.
Shotwell left his former employer in February 2013 and says the projections were accurate.
DON’T OVERLOOK PRACTICAL CONSIDERATIONS
Grundy started a solo RIA; Shotwell joined another advisor. Going solo means taking on the
myriad tasks of running an RIA as a business: marketing, compliance, administration, investment management and so on. Over time the advisor’s skill at — and enjoyment of —those
tasks will become clear, at which point he or she can decide which duties to retain. Another
option is to join an existing RIA, as Shotwell did, and leverage that organization’s resources.
“You can choose to wear all those hats and figure out whether they fit or not and you’ll only
do that in time,” says Shanks. “Or you could go to someone who has figured that out, does a
better job than you probably would and then just lean on them for that so you can focus your
ruling is likely
to accelerate the
switch to fees.”
“I think we’re at that
advisors are going to
be pressured by clients
to justify why they’re
getting a commission
for selling a product
versus what clients
are really looking for,
which is advice.”
first consider the
behind their decision.
If you do it based
upon all the right
reasons, the financial