Converting to Fee-Based A BETTER BUSINESS MODEL FOR TODAY S MARKET AND FOR YOUR FUTURE

Converting to Fee-Based A BETTER BUSINESS MODEL FOR TODAY S MARKET AND FOR YOUR FUTURE

CONVERTING TO FEE-BASED 2 Chances are, you ve thought about switching to a fee-based practice before. Maybe you have colleagues who are fee-based, and you ve wondered how your practice would be different with a steady stream of fee income and more certainty. The good news is, there s never been a better time to make the switch. As the chart on the next page shows, more and more advisors are changing to fee-based platforms because the benefits to their businesses, their lifestyles, and their clients are so compelling. Why have so many advisors made the transition? Advisors by Revenue Source, 2003-2010 100 7% 10% 7% 11% 12% 17% 13% 14% 80 60 39% 31% 27% 42% 37% 48% 40% 52% Don t Wait To Switch! 40 20 35% 18% 38% 21% 36% 29% 33% 13% 29% 22% 23% 12% 32% 14% 22% 11% More and more advisors are switching to fee-based. 0 Commission Only Fee-and-commission mix Fee Based Fee Only Source: Cerulli Associates Product Source: Cerulli Quantitative Update: Advisor Metrics 2010 Exhibit 2.11 We all recognize that the financial markets have become increasingly uncertain, and we ve witnessed areas once thought to be safe implode with surprising speed real estate, auction-rate securities, collateralized mortgage obligations and even certain parts of the municipal bond market come to mind. All evidence supports the view that a new investment reality now exists one which includes a heightened sensitivity to economic indicators and as a result, increased volatility that reacts to the financial headlines of the day. In this new investment reality, investors don t need sales people or products, they need a financial quarterback someone who can help them find answers to the where, when and how of investing; someone who can help them find security in an increasingly insecure world; and most importantly, someone who can help them achieve their financial goals in this new financial reality. But unfortunately, a predominantly commissions-based practice doesn t provide the opportunity to support clients in a more holistic way. In addition to being right for the times, building a feebased practice is essential to your ability to differentiate yourself from your competition. We ve all heard the inflammatory news that 90% of high-net-worth investors

CONVERTING TO FEE-BASED 3 are planning to switch advisors. While this statistic may be a bit over the top, no one can deny that recent markets have caused investors to reconsider not only the products in which they are invested, but also the advisors who provide them, and the role advisors play in guiding them into the financial future. The most effective way to tap into the present mood of the market is by showing that you can be the financial quarterback that dissatisfied investors are looking for. As a fee-based advisor, your success is tied directly to that of your clients. Your willingness to take a hit when your clients do helps to firmly establish your credibility and deepen your client relationships. Because the most obvious basis for conflicts of interest is diminished, and because you will be taking on the role of a higher-level advisor, you will have a greater opportunity to expand the scope of services you provide to your clients. Deeper relationships result in higher levels of client satisfaction, which can potentially enable you to uncover client assets that are held elsewhere and increase the number of referrals you receive. In short, a fee-based structure provides the opportunity for greater wallet share and increased referrals two things advisors constantly strive to achieve. A fee-based structure can also help build a more predictable future for you and your family. If you stay with commissions, there s a chance you ll be working just as hard 20 years from now as you are today. By shifting to feebased, you put in place an annuity stream of fee income, helping to make your future less uncertain. The chart above shows how, in time, a growing fee-based business can generate ample income. Additionally, a fee-based book GROWTH OF A FEE-BASED BUSINESS $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 0 of business has greater potential to become a valuable nest egg that can be sold when you are ready to retire. Keep in mind that, in contrast to a fee-only business, where commissions are not allowed, a fee-based structure gives you the flexibility to include commissioned products in your offering to clients. Being able to run a platform structured around annual fees, while adding commissioned products as appropriate to each client s needs, puts you in a position to truly be able to do what makes the most sense for your clients. The potential benefits of a fee-based structure are clear, but how do you get started converting your practice? Below, we discuss three basic steps that will take you through the transition. Year 1 Year 2 Year 3 Year 4 Year 5 If you increase your fee-based assets under management by $5 million annually for five years, your ongoing annual compensation from these assets alone will reach $310,000 by year 5.* * Assumes a 7% rate of return, an advisory fee of 1% per year, and $5 million in new assets added every January 1. 1 Segment and Evaluate your Current Business The first step of the process involves putting all of your accounts worth $50,000 or more onto a spreadsheet. You ll want to include the value of each client s account, whether their funds are taxable or non-taxable, and the products in which they are invested. Using this spreadsheet, segment your client base according to the level of involvement each client typically likes to take in the investment process. Each client should fit into one of these four categories: Outsourcers Have full faith in your decisions and easily agree to your recommendations. Semi-outsourcers Believe in your decisions and agree to most recommendations, but typically ask for more information.

CONVERTING TO FEE-BASED 4 Analytical More critical, need to be convinced of the benefits of your recommendations, sometimes ask for empirical evidence that validates your suggestions. Highly analytical Highly sophisticated, typically require joint presentations with your platform partner. This type of segmentation will come into play as you begin to execute your conversion to fee-based. The first group of clients you will speak to about converting will be your Outsourcers. Once you have refined your talking points and gotten comfortable explaining why you are making the change, you will be ready to move on to more challenging clients. Putting all of your clients into one spreadsheet provides a great opportunity to take a high-level view of your business. Take time to reflect on questions like, What types of clients do I enjoy working with? Why have they hired me? What s my value proposition? Which aspects of my work do I most enjoy? Which do I enjoy least? The answers to these questions will help you know where to redirect your focus. Putting all of your clients into one spreadsheet provides a great opportunity to take a highlevel view of your business. Take time to reflect on questions like, What types of clients do I enjoy working with? Why have they hired me? The answers to these questions will help you know where to redirect your focus. 2 Plan your Transition Once you have a better understanding of where you are and where you want to go, you can start thinking through the details of how you will manage a fee-based business. It s important to be realistic about the number of feebased clients you can serve. Remember that fee-based is a full-service approach. Will additional staff be needed to serve your clients? Can a junior partner take on more of your smaller accounts? How do you like to spend your time? The answer to this question will determine the type of platform you choose. Advisors who enjoy a hands-on approach where they select fund managers, determine asset allocations, rebalance portfolios, handle fee calculations and create statements and reports will want to choose a do-ityourself platform. On the other hand, advisors who prefer to focus their efforts on developing new client relationships and strengthening existing ones will choose to partner with a turnkey asset management platform, such as SEI. Turnkey platform partners can make the conversion process easier by taking much of the administrative burden off your shoulders. Before you choose a platform partner, be sure to find out about the level of support it can provide you in your transition. 3 Execute the Conversion Now that you ve thought through the details of how you will run your fee-based business, it s time to develop an implementation timeline that will move you from your initial conversations with your Outsourcer clients all the way through to your Highly Analytical ones. When building your implementation timeline, remember to consider how your conversion to fee-based is likely to affect your short- and long-term cash flow. Which clients are likely to sign on, and which are you willing to let go?

CONVERTING TO FEE-BASED 5 The implementation of your plan starts with communicating to your clients, beginning with your Outsourcers. You will need to explain why you are making this change and how it will benefit them. Start by sending a letter to your first group of Outsourcers explaining your reasons for making the switch, then follow up with a phone call to schedule a face-to-face meeting. At every client meeting, be prepared for a Yes. Have all the necessary documents filled out and ready to sign so you can start the transition that day. Be prepared to speak confidently about your conviction that switching to a fee-based structure will help you serve your client better. The following are some ways you might want to frame the change: Markets have changed, uncertainty has increased. The financial markets have become increasingly volatile, calling for greater diligence and oftentimes more frequent changes to portfolio strategy. I have put considerable thought into how I can best serve my clients in this new environment and believe there is a better way. With a fee-based structure, your goals are linked more directly to mine. As your assets grow, so will my fees; during inevitable market declines, my fees will shrink. This dynamic affirms a key aspect of our relationship that has always been in place: Your financial success is my top priority. I m moving my clients up to a better way of doing things. While commissions are focused on specific financial products, a fee-based approach stresses a broader, better goal of ensuring that your whole financial picture is in good shape. Fee-based offers a better framework for fully integrated financial planning, which I believe is the best approach to achieve your goals. A fee-based structure gives me the flexibility to respond appropriately to critical market changes without as much concern for the cost to you from trading activity. Remember, you are in the process of transitioning from a product salesperson to your client s financial quarterback. Clients who have been satisfied with product sales are probably going to need to have the vision painted for them of what a dynamic advisor-client relationship can look like. Have your elevator speech ready, explaining your services in the context of helping your client reach his or her most important financial goals. Let your clients know you will be: Providing them with customized financial planning and guidance, Giving them access to a wide range of well-researched investment opportunities, Rebalancing and reallocating their portfolios on an ongoing basis, and Monitoring their portfolio continuously to make sure they stay on track toward achieving their goals. By the way, if you haven t spoken to your clients about the financial goals they hope to achieve, now would certainly be a good time. Don t make assumptions: Ask and then be ready to listen. At every client meeting, be prepared for a Yes. Have all the necessary documents filled out and ready to sign so you can start the transition that day. Once a client has signed on, you will need to determine how to redeploy their assets onto a fee-based platform. The size of their holdings will likely determine whether you will place them in mutual funds or separate account management. This step can easily be the most timeconsuming part of the process. Talk to your platform partner to find out how they can assist you with this.

CONVERTING TO FEE-BASED 6 SEI Can Help Throughout this article, we have mentioned the importance of choosing a platform partner who is willing and able to support you through this transition. At SEI, we have a proven process in place to help advisors like you transition to a fee-based structure. To date, we have successfully transitioned more than 600 advisors to fee-based. As you do your research about potential partners, we think you will find that SEI stands alone in its dedication and ability to help advisors achieve their goals. Here are a few ways we can make your life easier as you make the transition to a fee-based business: From the start, SEI assigns you a dedicated business transition team that can help you through each step of the conversion process. This team of specialists will help you develop your transition plan, segment your client base, and provide all account transfer paperwork. In addition, you will have access to well-crafted, customized communications that take the guesswork out of what to say to your clients. Our client-approved letters and scripted PowerPoint presentations make it easy to explain how a switch to a fee-based structure will help you serve your clients better. Your dedicated SEI team can also help with investment policy statements and can help you fill out the range of services you provide to your clients. For group meetings or presentations to more challenging clients, your SEI Practice Consultant can come along to help get your message across. A transition to a fee-based platform is a hurdle that will require added diligence and patience in the short-run. With each step forward, keep your eye on the goal, remembering that a fee-based business will bring you: The chance to change from a product salesperson to your clients financial quarterback Deeper client relationships that result in the potential for greater wallet share and increased referrals Fee income that can help you build a more predictable future for your family The potential for a more salable business as you head into retirement To learn more, please contact us toll-free at 855-734-9660 or visit our website at www.seic.com/assetmanagement Services provided by SEI Investments Company and its wholly owned subsidiaries. This piece is for educational purposes only and is not meant as a guarantee of any specific result. 2009-2011 SEI 111205 (08/11)