Switching to a Fee Model Can Benefit a Practice

As the wealth management industry becomes more competitive and complex, advisers need to embrace new business models in order to remain successful, CLS Investments LLC says in a white paper, and the adviser movement toward fee-based models is front and center. The reason: fee-based advising and investment management outsourcing are key ways to enhance client service.

“Making the Switch: The Benefits of Moving to a Fee-based Model” visits the theory behind the adviser trend to switch compensation models. The movement away from commission-based models has been a growing trend in wealth management for more than a decade, CLS says, and could even be reaching critical mass. The Advisor IQ Series white paper notes the amount of assets in fee-based accounts more than tripled, from $987 billion in 2003 to $2.7 trillion in 2013, according to data from Cerulli Reports.

That means that for the first time, advisers derive more of their total revenues from fees than commissions. However, the commission model is not yet obsolete. According to CLS:

• 11% of advisers are commission-only;
• 23% of advisers are fee-only; and
• 23% of advisers use a mix of both compensation models.

With the emergence of low cost, online robo-advisers, this trend will only accelerate because of technology-driven, competitive options. CLS reassures those advisers that have not yet embraced fee-based compensation models and says there’s no reason to panic. “The good news is that it is never too late to begin,” the paper says. While there is a definite urgency for advisers to transition their compensation models, most don’t have to abandon commissions altogether.

Commission-based advisers can gradually transition their book of business. Many advisers that have made the switch to fees often say they’ve accrued many business benefits. They also note that they are able to provide enhanced service to their clients.

The move away from time-consuming transactions can help advisers free themselves from having to constantly sell investment products to meet their revenue goals, the paper notes. Annuitizing their book, as CLS describes fee-based service, advisers generate a renewable and predictable revenue stream by accessing professional, institutional-caliber third-party money managers for ongoing outsourced investment management. 

The increase in an adviser’s time and productivity translates directly into the ability to better service clients, develop enhanced relationships, and pursue new business development opportunities.

“Advisers have told us that by freeing themselves from having to act as salespeople and maintaining more of an open architecture approach, they are able to more easily outsource time-consuming functions, such as portfolio management,” says Todd Clarke, chief executive of CLS Investments. “As an adviser, time is a valuable asset, and with more time on their hands, advisers can focus on better servicing their clients, developing relationships, and pursuing strategic business development opportunities.”

Another advantage is that fee-based advisers no longer have to start each year with zero in revenue, which automatically puts them into production mode and takes valuable time away from higher-value activities such as strategic planning, prospecting, and relationship management.

By outsourcing the time-consuming tasks of portfolio management, trading, rebalancing, and reporting to professional third-party money managers, advisers free up valuable internal resources—which can lower costs and enhance productivity, adding up to better profitability and the ability to drive higher incomes.

“At CLS, we have a front row seat to the industry’s top advisers, which allows us to see how industry trends are born and continue to evolve,” Clarke says. The white paper is intended to encourage an open dialogue around how professionals can make strategic business development goals that simultaneously benefit their clients, he explains.

“Making the Switch: The Benefits of Moving to a Fee-based Model” is available on CLS Investments’ website.