A white paper published by wealthmangement.com provides case studies of two advisors who made the shift to fee based practice.
If you are considering registering with SEBI’s Investment Advisor regulations or have already registered then you will have to make a transition towards fee based model. The immediate impact doing away with commission based structure would be on your revenues.
A white paper published by wealthmanagement.com notes that commission based model has important drawbacks. “Perhaps foremost among them is the fact that commissions happen only as a result of the sale of an investment product— whether mutual fund shares or a variable annuity—so advisors using this model have to re-create their revenue stream each year. Revenue can vary widely from year to year, leading to financial uncertainty for the advisor,” states the white paper. IFAs following purely commission based practice have to either sell new products to existing clients or find new clients,” observes Linda CFP Founder, Gilbert & Cook who shifted to fee based model 20 years ago.
There are several ways through which you can make this shift. The whitepaper presents two case studies of advisors who made this transition. Of course, the markets where these advisors operate are not akin to India but it is worthwhile to see if you can adopt some of the methods adopted by these advisors in your practice.
1) Linda Cook, Founder of Gilbert & Cook transitioned to a fee based model 20 years ago! She drew up a list of clients based on the size of their assets and whom she assumed would be open to the idea of the firm’s changing strategy. (For instance, you can draw up a list of clients who have invested Rs. 50 lakh and above and tell them about your plans.) She would set a target to shift the clients who invested say, less than Rs. 50 lakh towards fee based model over a period of time. Also, she would target to funnel new clients directly into the fee based practice. She implemented this model in five years to deal with the disruption in cash flows.
2) Sharon Almeida, Founder and CEO, Cents & Sensibility made a menu of the services that her firm would offer based on the size of assets. The services would expand as the AUM moved up. For instance, a client with Rs. 1 crore of investment would require more complex planning and thus requires, say two meetings annually while a client with Rs. 50 lakh of investments can be offered one meeting annually. “When you’re on commission, you work with each client the same
way. But when you’re fee-based, you need to figure out how much time and energy you can devote to servicing a client while still maintaining your profitability,” says Sharon.
However, Lovaii Navlakhi of International Money Matters says that it is not a good idea to segregate clients based on the quantum of assets under advisory. He says that IFAs can start with a small value add service to smaller clients. “You should segregate clients not based on the assets but based on the potential. Start with offering small value add service. If they are satisfied you’ll get a higher wallet share. Sometimes clients come to you to evaluate your service. So it doesn’t matter how big or small the client is,” says Lovaii.
Alternatively, you can operate on a hybrid model (fee based and commission based) depending on the clientele and your business model. There are enough, if not many, examples of how IFAs in India are making this transition. Ultimately, it is up to you to decide on what value add you can bring to the table and how you can make this transition.
(Prepared based on a white paper published by wealthmanagement.com sponsored by VSR Financial Services)
