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Panel: Tips for switching to fees

Caroline A. Banks, FPFS; Kenneth E. Davy, Cert PFS, FCII; Gregory B. Gagne, ChFC; Gino Saggiomo, CFP

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Audio 1:01:15

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Regulations around the world have left many advisors with no other option than switching from a commission-based business model to one that centers around fees. Other advisors have made the switch voluntarily when they saw the benefits. A panel of industry veterans who have successfully incorporated fees into their businesses discuss the challenges and rewards of the switch from the perspective of both the advisor and the client. Among the questions the panel addresses:
• How do you properly value your advice?
• Do you base your fees on time spent, value added or a combination of the two?
• Do you pick a “line in the sand” date to transition clients to the model, or is there a transition period?
Gain proven ways to convince clients that paying for advice is best for them, tips for compliance, confidence in your ability to transition your practice and excitement about the opportunities ahead.

Banks: Regulations around the world have left many of us with no other option than switching from a commission-based model to a fee-based model. In this session, you're going to hear from advisors who have been through this transition. Now, some of us have done it because we had no choice. Others did it in preparation for the changing legislation. And Greg, here from the United States, did it on a voluntary basis. It's how he wanted to work.

Before we get started, let me give you a little bit of background on our speakers. Ken Davy is a 46-year member and, in fact, the longest serving member from the United Kingdom. He's chairman and founder of the SimplyBiz Group, which provides compliance and support services to more than 6,000 financial advisors in the United Kingdom.

Top of the Table member, Greg Gagne, is the founder of the Affinity Investment Group. He provides investment management and wealth distribution strategies to retirees.

And then Court of the Table member, Gino Saggiomo, is an early adapter of the fee-for-service model. He currently sits on two separate industry committees about the issue of implementing fee-for-service methodology into everyday practice. Note the words Gino uses, "fee for service." And that's something that we'll come on to.

Some of us voluntarily changed practices in anticipation of change being introduced, others of us had a firm deadline to make that change. We had a complete commission ban introduced in the United Kingdom starting January 2013. Ken's perspective is helping the firms, over 2,500 firms, make that transition. Greg wanted to build a business with inherent value and what he calls "scalability," and that's something we'd like to talk about today.

The aim of this session is to give you takeaway pointers on how we did what we did. Whatever country you're in or wherever you're from, it may be happening, some change may be happening, and it's good to think about it as soon as you can. From a UK perspective, if it had hit me with six months to go, we would have not only come through it, but we would have thrived through it. I promise you through this session, we will demonstrate why we would not go back to the old way of working. We sit here now as people who have come through, changed their business models, and thought, Why did it take us so long to do it? So very, very positive outcomes.

What we tend to find is when people suddenly get hit with, "You're going to need to charge fee for service in X years' time," the first reaction of just about any advisor I've ever spoken to is, "Well, my clients won't pay a fee." And we go into a cold panic. So I'm going to start off the discussion. Gino, why is it we don't think people are going to pay us for what we do?

Saggiomo: Interesting point to start off with. The reality is they've been paying it anyway; it just hasn't been received in a transparent sense as what we might expect under a fee-for-service rating. In our case, what we found to be the greatest issue for us as advisors, our mindset. We've been conditioned for such a period of time to receive commissions from a product. And the only time we got paid was when a product was put in place. So why would a client pay us directly for sitting across the table from us? Once we got around that mindset, it became a lot easier.

Gagne: For me, it's the same type of thing where Gino is explaining. The reason that there was a barrier there was fear. Am I worthy enough to charge a fee? Will the client pay a fee? And if I ask them to pay a fee, how are they going to react to it when I do? Once I got over that fear and I compartmentalized it and put it away, I went out to my top 20 clients, and I had a conversation with each of them. I asked them, "Listen, this is what I'm looking to do. I'm looking to become a bit more transparent with you. I'm looking to charge a ongoing fee instead of only when I sell something to you. And I want to know how you feel about that and if that is something you might want to come along with me on." And out of the top 20 clients that I asked, every single one of them embraced it and actually started cheerleading me on to do it. And all of them are still clients of mine today. That was done back in 1998. So for a lot of us, the fear of change is what prevents us from making that leap. Probably one of the best decisions I've made in my business career was making that change.

Davy: The fear factor is very strong, and it comes in part from lack of confidence. I think you also have to look at your existing clients like Greg did. But ask yourself, Do any of them think you do it for free? Are you a charity? Of course not. They all know you get paid. What they don't necessarily appreciate is the impact of what you get paid on the products they buy. One of the things you'll see as these changes come in is that you will want to be more transparent about the particular products you're using, and you'll want to use products that have better costing and are more advantageous to the client. Because, after all, the client is paying you a fee to do the best job you can for them, and you are going to have to ensure the products you advise them on and the financial planning you advise them on will stack up.

Banks: Greg, your scalability. You went early because you wanted to achieve this in the business. Describe what that is.

Gagne: There were two things I was trying to do in this move. One was to build enterprise value in having an organization that could be saleable at some point in the future. And the other thing I realized when I was making this transition was that I was only being paid when I was executing performance. Like at the show to close the case. We do a lot of work behind the scenes; it's not just a performance and how we can get paid ongoing for the work that we're doing on a continuous basis. And that is really what allowed me to start scaling the organization.

Banks: Before we can start to charge a fee, we have to work a thought out: What is the fee? How is it made up? There are many different ways of charging a fee. But we all know it won't be to every single client that we're probably looking after at the moment. Gino, do you have thoughts on how you had to look at your clients?

Saggiomo: The first place we started was a standard spreadsheet that had the amount of hours taken to generate the advice. We spent a bit of time going through that, and then we threw it away. Why should the value of our advice be underpinned by the amount of time it takes us to put that advice in place? Aren't we here to guide people through? Aren't we here to guide them to get solutions that mean something to them? Some real outcomes.

The big decision we had to make was to move toward projects. I'm going to do a project for you. This is your life that we're working on right here and now. And the amount that we charge is based on the level of complexity that's involved and the value it adds to you right at this particular point in time.

Davy: I think there are four measures you can use, and time is obviously an important one. But much more important than that is the complexity of what we're dealing with. And the responsibility. Because as an advisor, you have full responsibility and liability for the business that is written. Certainly in the United Kingdom. And I suspect in other parts of the world. So you've got time, complexity, and responsibility.

Then there's a fourth one, which I think is very important, and is certainly one that attorneys and accountants keep in mind, and that is what will the market bear? And that's an important factor. So you've got time, complexity, responsibility, and what will the market bear. Because if you look at what lawyers and accountants do, they invariably give higher bills to wealthy people. Because they know they can pay it, and they expect to pay it.

Gagne: Specifically for our firm, we did something comparable to what Gino did, which was that we did a cost study based on the revenues and expenses and divided by the number of clients to have a baseline idea as to how much it actually costs me to have a client. It's kind of a different way of looking at it. From that, we set our minimum engagement fee that some people would pay our organization if they wanted to hire us.

I have no problem sharing those numbers with you. Our minimum fee is $2,500 just to engage our organization, and there's a sliding scale that goes up to $10,000 depending on the complexity of the situation and the scope of the work that's involved. And in addition to the planning fee, if they decide to use us for investment management ongoing, at this particular time, I charge a percentage management fee, and it's a sliding scale on that too. Typically speaking, it's around 1 percent per year.

Banks: Essentially, you're being paid twice for the work that you've been paid once for before.

Gagne: I'm getting paid for the work that we did. The client doesn't have to implement everything that I said to do. We can't force them to do so. But they hired us to tell them what to do, so we get paid for what we did. And then if they want help on the investment management, well then that will be a separate agreement.

Saggiomo: I can give you an alternative perspective. We had considered that, but as I practice, it moved well and truly before the legislative landscape changed in Australia. We could see percentage-based fees departing at some point in time on investments. One of the things, when we sat down and analyzed what is the true value we want to add to that client, is not to be anchored to a product or an investment. So at that point, we had to make the decision that it's a number for the advice; it's a number for the fee. And that's it. That was one of the toughest things to come to terms with.

Davy: Certainly in the United Kingdom, it's a very common practice to provide a continuing service to clients and charge for it. And that charge is very often related to the amount of funds under management. Some firms will charge .5 percent, but probably the most common is now 1 percent. So if you're looking after $1 million, it's 1 percent of $1 million. And so on and so forth.

But there's a context I think we ought to look at here. In 1988, in the United Kingdom, there were about a quarter million financial advisors. Now some of those, probably about 10 percent, would never actually expose themselves the day you were making the sale because they work for the insurance companies and stuff like that. But essentially, when regulation started in the United Kingdom, there were 250,000 advisors. Now there are under 25,000. That's a 90 percent drop. This is a wakeup call for the areas that don't currently have regulation. And believe me, regulation never finishes as it starts. It gets tighter and tighter.

But the other point of that is that also 80 percent of the insurance companies have disappeared. Eighty percent of the insurance companies that were around in 1988 no longer exist. These are scary numbers. Now, in MDRT, you're going to be the survivors. But the fact is that a whole lot of the industry is not going to survive.

Saggiomo: From an Australian perspective, we've got education standards that are coming through. And I was reading some anecdotal evidence during the week that was saying there's an expectation that about 5,000 or 6,000 advisors will leave the advice force. It's just too hard. So raising the bar on education is important, but actually, we end up having a lot of experience that leaves the industry.

And the other point to that is that which drives up the cost of advice and the ability of people to actually obtain advice that need it the most. So yes, it is an absolute wake-up call.

Banks: Client demand.

Saggiomo: Absolutely.

Banks: Giving the advice enables us to charge a premium.

Saggiomo: So one thing that worked well from our perspective is moving early and making a stand. And having a clear position on it meant that when regulatory change did eventually come through, we had a really good story to tell our clients. This is coming through, and it's mandated, but you know what? We've been doing it for about eight years already, so we know what we're doing.

Banks: When the commission ban in the United Kingdom came in from January 2013, we lost another wave of advisors, not because they couldn't transition their business, but it didn't matter if you had been in the business for 50 years, unless you were to require standard of qualification designation, credential, whatever your word. So you could no longer practice. People with vast experience, no complaints against them, but who chose not to take the further exams to elevate them to a certain level, could no longer stay in the business.

Again, it isn't just looking at how we're paid. It is our qualifications and what we're paid for. And it may not be something that happens in your part of the world, but why not prepare just in case? Would you agree, Greg, the more qualified you are, the fee can be based on that?

Gagne: I think definitely having some credentials gives you a better opportunity to assess a higher fee for your expertise level that you might have. What I'm hearing from Ken and Gino, in what we are facing starting at the end of this week in the United States, makes me a little bit nervous as an advisor because I think we're going to ultimately end up with an underserved marketplace as a result of the regulatory regime that is coming upon us.

And in hearing what you all have to say about what's happening in your respective countries, it makes me a little bit nervous on that too. I think there's great opportunity for us, but I think we need to be on the front end of this wave as it's coming and not be reactive as things are coming. I really hope that as a takeaway from today, all of us will be moving faster than what the governments are telling us we need to do so that we can only make adjustments in flight instead of completely rebuilding our practices at an inopportune time for sure.

Davy: Greg is absolutely right. And what we're finding in the United Kingdom now and the government is waking up to, is there is an advice gap. So that's leading to a protection gap. There are more widows relying on Social Security because they haven't had the protection that this great profession can provide.

And there's a savings gap. People are retiring with insufficient savings. And the reality is if we look at a $2,000 minimum fee, a lot of people are not going to be able to afford those kinds of minimum fees, and they are going to be left out. There will be no one who wants to advise them.

So what's happening in the United Kingdom now is they're looking at how they can bring in robot advice. Can they get machines to do it? And what the robot advisor is saying at the moment is—well actually, they can't get machines to do it. They still need personal interaction because machines aren't all that good at finding clients and building relationships. So perhaps the model that comes forward in the future will be a combination of technology being used by financial advisors themselves. So you get that blend.

Saggiomo: I get asked the question about robot advice a lot. And my standard answer to it is quite simple and a little bit trivial I guess. I sort of put it this way, and I put it in the context of a personal trainer. You can go anywhere and get a program to get fit, to build up muscle, to do all those sorts of things. But if you've got that program, does that mean you actually go to the gym? Does that mean you do anything with it? Having an advisor there to talk you through that and get those accountabilities in place. There's a place for robot advice, but it's not going to get the outcome we expect.

Banks: Gino, how did you determine who to work with? Which clients?

Saggiomo: I guess in our business, we've structured it as a team of specialists rather than a team of individual advisors. There are a lot of things in the advice space that I don't enjoy working on, so I made a decision along with Ross. We both made the decision that we didn't want to advise in that space. That we recruited to get the right people to do that job. And it actually has presented a really good story for us because we can go out to clients and say, "Look, you're dealing with a team of advisors, not just me." That deals with the succession side of things. That deals with if I'm away overseas at a conference. All that stuff. But it also brings really good minds into the group and we can share off of each other, similar to what we're doing now.

So dealing with the right clients has been one where we workshopped it as a team of advisors and became quite specific. And there's a little matrix document we've got in place that is pretty clear as to which clients are better suited to the different types of advisors in the practice.

Banks: If somebody could afford your fee, would you still just take him or her on?

Gagne: We do some pro bono work if they can't afford me. Is that what you're asking?

Banks: If they can afford you, can they just automatically be one of your clients?

Gagne: If there's a philosophical fit, yes. If, when we have our initial consultations and conversations, it seems like we're kind of not going to be together in our thought, we typically would—I call it "bless and release them." Thank them for talking to us, but we're probably not the firm that's the right fit.

Davy: Right from the outset, I came into the business December 7, 1970. And I used to see a lot of people, salesmen around me, who would struggle to sell to people that they couldn't get on with, and I thought that was pretty stupid. We've got the opportunity to choose who we deal with. So if I feel in the first 20 minutes, half an hour, that I'm not going to be able to build a relationship with them, I used to thank them for their time. I used to always ask for referrals. I got my best referrals from some people that I couldn't stand. I'd wish them well, and I would go on my way. Why should I spend two, three, four hours of my life trying to convince someone to buy something when there's no real relationship? And I just don't feel I'm going to build that.

I found that made it a much more effective use of time. There are so many people in the world. There are probably people, Gino, that you could sell to that I would never sell to or advise using current terminology, in a million years. And the same would go for you, Greg. And vice versa. So find the people you get on with, and get on with them and do business.

Saggiomo: The other point there is that I don't feel comfortable in myself if I'm taking money from clients when I don't enjoy working with them. To me, it just doesn't compute. They won't get the best out of me, and I'll hesitate to return a call or something like that because I want to deal with the clients that I want to deal with. So it's as much for them as it is for us.

Banks: My firm has been very radical. We've gone through, Ken as you remember before the commission ban, treating customers fairly and the retail distribution review, which demanded that we look at categories of clients and the service we would deliver to each. So I have very firm criteria about what puts you in my top 15, which is currently 20, and it needs working on. The main group here, what got you in there, was income, assets under management, or possibly inheritance. The next category, what gets you there, and then those people I just choose to do some pro bono work for.

But we are really quite harsh. We run a central London practice. The costs are high. And if you don't meet the criteria, it may be you just can't get in. Segmentation of clients. What is your view on this? And what we do for that.

Davy: Well, personally, I've never been a great lover of segmentation. I'm a bit of a reactionary in that sense in that I want to try and ensure that people of every level are looked after. You hear people who have a dead client box. The only way you could get into my dead client box—well, there were two ways. One, you could die, which was pretty effective. And the second was to actually tell me that you didn't want to deal with me anymore, and then you went to the dead box. But apart from that, I would try to provide a service regardless of your income level. And it didn't feel as if it inhibited my income.

Banks: We were going to be losing trail in the United Kingdom on clients after a certain date. Is it fair that you'd have clients you're charging for and then an awful lot of liability and responsibility here you're not being paid for? How would we deal with that scenario? Is that something you've had to confront?

Saggiomo: Not yet. But if I take us back to segmentation for a moment, I can give you an honest handle on that experience in our business of how we got it absolutely wrong. It was like a child that got a toy at Christmas. We said we had to revamp the client value proposition, and we had six categories. What were we thinking? We now currently have that down to around two, and it's either a client or it's not. And then you're a sophisticated client. People understand that nice and easy.

On the other point around the clients you're talking about, fundamentally, I personally have an issue around receiving money from people that we're not doing work for. That's not to say we don't have those clients within our practice. So that's something we constantly need to work on. But the days, in my mind, particularly in Australia, of sitting on a book of clients, are done.

Banks: I found that at the Indianapolis meeting, which was in 2009, I found so many answers that were going to help me with the transition. There were template letters, and one that I'll just briefly go through was somebody who had been a policyholder that I just knew was not going to pay a fee for the service going forward. And this letter effectively said, "We've been working with a consultant. We are relooking at our business. We are going to be having a charge in the future for planning service. We understand you may not wish to pay this and, if we don't hear from you within two weeks, we will ask the investment or insurance company to take care of you directly." We found that was good in terms of taking numbers out. Be very careful if you keep taking money from somebody you do nothing for. One of the big banks, I think it was HSBC, had a lawsuit and had to pay back all the income they had received over X number of years when it wasn't proven they'd done anything for that client.

Saggiomo: And our corporate regulator issued a report, a handful of months ago now, called "fee for no advice." It focused on the top five big banks and their planning, and the amount of money that was encapsulated was staggering. But now what you've got on, you jump on Google, and fee for no advice is all over the place. So the information is out there. People are much more aware of it.

Gagne: I think when you made your transition, Caroline, and when I made mine, I really looked at it as an opportunity. A lot of clients, but they really weren't clients, they may have purchased a term insurance policy from me once, and that's about all the activity I really had with them. I did something comparable to what you're talking about. I informed my client base what we were going to do as an organization and the rationale as to why we were going to do it. This is your opportunity. I kind of put it on them. It's their choice to make. Sign on to the firm, and we'll start a new relationship under the new terms of our agreements. Or if not, just like I said before, it's more or less a bless-and-release situation. Where it gives you an opportunity to, I call it "trimming the hedges," to get some of those clients that maybe you really shouldn't be doing business with anyway, and either transition them to somebody else or house them back at the company where they came from. That was huge for me. It freed up a lot of time initially as a result of some of the folks not signing up. And really gave me almost like a reset button on the business, which has been fantastic.

Davy: In the United Kingdom, the position is very clear. If you take money from a client, you have to deliver a service. There are no ifs or buts about it. It is a registered climate. If you have an ongoing fee, it has to be for an agreed service. And that agreed service has to be, should be, in writing. I don't know of anyone who does it without doing it in writing, so you have a contract with your client to provide certain levels of services.

Now for me, that's never been an issue because, unlike a lot of people, I've never been solely transactional. I charged my first fee in 1971 because it was clear that it was just a sensitive situation they wanted me to help with and advise them on. But I wasn't going to generate any what you would call "normal business."

But if I had tried to survive on fees for the next 40 years, I think I would have starved. I intrinsically see nothing wrong with commission, but these transitions are having to take place. What I used to do in the United Kingdom from 1971 was that I provided a continuing service to clients. I used to have eight touch points during the year. I used to send out a calendar, a budget letter of fiscal use, and four quarterly newsletters. And then during the year, I would try to find a couple of things, articles and that type of thing, that I could just photocopy, scribble "I thought this might interest you" on it, and send it out to them. That gave me the right when I phoned them up to expect them to be pleased to hear from me and to have another meeting. You might find someone who bought a small term policy, and now he or she is in a position to do something very substantial. Which is again, why I never had a dead box.

Banks: Gino, tell us why we've got to be very careful in drafting these service agreements.

Saggiomo: We have a situation where our regulators are looking at our service agreements. They'll go up and down the list and suggest that you're going to have two review meetings with these clients, see four newsletters, and two seminars. Did you deliver on all of those items? And if you didn't, how can you justify taking that fee from that client this year?

Banks: So you're saying if you miss one newsletter. . .

Saggiomo: You've potentially got this issue of how valuable that is to the overall fee. And should the client then be refunded that fee?

More important than that, well as important as that, is every year we need to disclose in writing to our clients what we said we were going to do, what we did, and how much we physically received in remuneration. Clear, transparent. Single document. It can't be done and mixed in with any other paperwork. It is out there.

Now, there are some advisors in Australia that are finding ways not to give that to clients by logging in. Ask us for a password, and we'll give you the password because it's still in our drop box and stuff like that. In our experience, yes we've had some clients who have said, "Are we paying you that much?" For the conversations we've had with some where we're saying, "Look, we are delivering you great service. Here are the outcomes we've achieved and the milestones we've delivered. But I actually think we're charging you enough." And with the clients, it's been received quite well. So we shouldn't look at those things as negatives. I sort of say if you put those things out there and you lose a few, then you probably shouldn't have had them in the first place. But isn't that an opportunity to really talk about the value of your advice and how much you are actually being paid? I don't have a problem at all.

Banks: What a great document, to look what I did for you. All the things I did, all the things I saved you, made you, and helped you with. I do urge people to keep a document like that. Ours is called the "value-added calculator," because there may come a point where somebody says, "I think that's a pretty hefty fee for what you're doing." And you point out, "Because I got you a certain certificate to protect your pension fund, I saved you 55 percent of half a million pounds. How can my fee be too high?" And always keep some evidence of what you've done. If you moved a policy from a husband to a wife, and it saved some tax, record it. It may be useful just to bring that up at the point somebody talks to you about the fee.

This value thing. So many people say, "Well I provide you value." What is it, Greg, that clients really value about what we do?

Gagne: I think we are their trusted advisor and, really, because we have a different perspective. We have a different lens. We're on the outside looking in, either to their family or their business situation. Once they start building that level of trust with us, sometimes we may have to have uncomfortable conversations, but they always know they're going to get the truth from any of us. And any of us in this room in fact. And that's really our value. We're just like coaches. It's not that we have good insurance or we have good investments. People call us for a variety of reasons. Sometimes it has nothing to do with money at all. "My daughter is getting married. Do you think this is a good venue?" You just never know what's going to come up. "Well, yes, it's a pretty good venue. Am I coming to the wedding?"

Davy: Well, the question of value is all about the perception of the client. And what we do is, they have problems. We don't create the problems; they have the problems. And to them, they often seem unsolvable and certainly complex. And what we do is come along and simplify those and make them understandable. And we do a lot more than that because we then show them how they can actually start to make some progress in solving them. So we make the complex simple and understandable so they can act and get the results they want.

Saggiomo: My job with clients is to be able to be that person who understands who they are, where they're going. More importantly, not why they're doing it, but what they stand for, so when something comes up, they can rely on us to show them leadership and give them the unbiased opinion on it.

Probably when this really dawned on me was a number of years ago when I was identifying what type of home someone wanted to buy. They spelled it out in intricate detail: three bedrooms, two bathrooms, big yard, nice fence at the front, all that sort of stuff. Perfect detail. And that's what we're supposed to do, right? Big, nice, clear goals. The home they bought was something completely different. And it took me a little bit of time to work out that they're not buying the home for what it looks like; they're buying the home for what it represented. And I was able to go through a process to show them what was able to be done. And it was, in fact, better than what they thought in the first place. Now that's valuable advice as far as I'm concerned.

Banks: I personally learned so much from the crash of 2008 and early 2009. People thought banks were going bust and everything. My proposition to clients is simply, "I hold your hand. I take you through this. I'm going to try all I can to stop you making mistakes." And people just know that they're taken care of. And they are prepared to pay me for taking care of them.

Gagne: I'll add to that, Caroline. Exactly what I was going to say was the financial crisis was a perfect example. Our value for our clients is to prevent them from making short-term decisions that will have lifetime consequences. When things are good, it's easy. But when things are bad, they need people like us to stop them from doing things that aren't smart.

Banks: I'd like to give you some takeaways on how to get that transition underway. Is it that we do entire client bank, do we look at five clients, 10 clients? Snapshots in how to do this.

Gagne: If I was to redo it again, I would, for me, do it the same way I did, which is that I would start by making the decision that you're going to go for it. That's number one. Number two is that I would highly recommend you go to your best clients that you just adore. Not all of them, maybe 20 of them like I did. Phone them up and tell them you want to sit down and have a conversation. It has nothing to do with their client situation. You want to talk to them about your firm and the future of your organization. Then go out and see them. Ask them if they would stay on with you if you were to make this move. Then quiet up. Just be quiet for a minute and let them answer.

I think you'll leave each and every one of those meetings like—they actually will tell you. They told me this: "I finally will actually understand how it is you get paid." This is unbelievable. I'm like yes, not a problem. They were relieved to know how they paid us. And every one of them was ready to do it, and they did. So that's kind of how I started it.

Then once I got their commitment to it, that's when I started going down the passive, compliance and regulation and all the other things I would need to do to form the business enterprise to be able to actually execute. But, first things first is that you should have the conversation, make the decision if you're going to do it, and get on with the decision. Then secondly, talk to your key clients and see how they feel about it. Then sit back and enjoy the ride, because they're all going to tell you, "Yes, please do it."

Banks: Ken, would you suggest people start this with clients, new clients?

Davy: Personally, I think it depends on the regulatory environment. If you are in a situation where the regulations are going to change and you know it's going to happen, then you have to do something about it. Change your business model in the way that we've been hearing about.

If it's something you're doing as Greg did on a voluntarily basis, it's going to depend, to a very large extent, on your marketplace. Because if you're dealing with Mr. and Mrs. Average, and you're going to go along and say, "I'm now going to charge $1,000 or $2,000 to look after you," then you're going to have some difficult conversations.

There's an old adage that you should never leap an abyss in two jumps. However, I think in this case, if it isn't regulatory driven, then you need to do it on a very gradual basis. Take the kinds of decisions that Greg did and experiment because talking to your clients, you will develop experiences that will help you be more effective with the next client you meet. I would have no problems dealing with either new clients or existing clients. But I think you need to decide how you're going to build it over time, if you have the advantage of time.

That gives me the opportunity to touch on regulation. Regulation is going to get worse. Whatever your current environment, it is going to get tighter and harder because, in the United Kingdom, there's a building with 3,000 regulators sitting there. They go in on a Monday morning, and their sole job is to think of how to regulate you, so they're not going to make it easier. They're going to think of new rules. And that's what happens. Regulation is going to come down the track, so you need to be thinking now on how you're going to deal with it.

Saggiomo: I'm just thinking of a couple great thoughts there about making a conscious decision to move. For us, it is that we made that conscious decision to move, built it in a way that we could frame it with clients, and then we used it on new clients. And that's where we started. The next step was having a chat, too, with some of our longer-established clients. Which goes back to the point around relationships. I've always been told relationships are important with your clients, and I agree with that. But I've got enough friends. I'm looking for good friends. I'm not necessarily looking for friends from my clients. That means we need to have difficult conversations. When you do get to be good friends, then you'll get honest answers as well. When you go to those top clients, they're the types of answers that I'm looking for. Because I'm going to be hard on you, why not be hard on me as well?

Banks: Before we move to Q and A, can I ask each of you to take a couple of minutes and just sum up any points you'd like to give to our members. Start with you, Ken.

Davy: I think I'm going at the end.

Gagne: Start with me. For me, making this transition is probably the best business decision I ever made. In my circumstances at the time, I was an under-the-table qualifier and struggling, and I was having a really hard time with the peaks and valleys of being in a transaction-based business. Everybody would be celebrating between Christmas and New Year's and starting the new year off, and the new year and everything is great, while I'd be starting the new year off, in my mind, broke with a whole new year ahead of me where I needed to go out and close cases to make my income.

Once I made the move over to the fee-based model, I could wake up on January 1, knowing exactly what was coming in the door in a few short days because most of my billings were done on a quarterly basis. It made it much easier for predictability of cash flows. It made it much easier for budgeting. It made it much easier for strategic growth opportunities. And that's for us.

How about for our clients? Well, for the clients, it was transparent. And as I mentioned a little earlier on, they loved it. They loved the fact that they knew what they were paying for, what we were about to do with them. And not only that, when they actually bellied up to the bar, when they put skin in the game and showed up with a check to engage us, they were serious about working with us. And because they're part of the planning process themselves, you won't have to chase them around so much to get data from them so that they'll take action.

And I'll just end with, people often ask me, "You're at Top of the Table. How do you make Top of the Table?" There is a progression, and it is linear. It sounds easier than maybe it is, but it isn't that difficult. If you're an MDRT-level producer, terrific, that's great. That just means, like when I got there, I could finally close cases, and I was really working hard. But to go from MDRT to Court of the Table, the common denominator there that we had when I interviewed other Court of the Table members was that they started to specialize. They stopped being a generalist, a master of no trades.

And then from Court of the Table to Top of the Table, the leap there that I discovered in talking to Top of the Table members when I was trying to get to that level myself was not only were they specializing, but they also started to run their businesses like a business. They think differently. They're more of an entrepreneurial spirit. Running an organization. For me, all those things along the way have been the biggest game changers for me.

Saggiomo: I see my job as an advisor to not predict the future, but to preempt the future. That's what we do with clients. We help them get into the future. When we think about a regime that may or may not be coming, it's incumbent on us to do the things that we do with our clients. And that is, think about what change might need to come into play, and do something about it. You might accept that we'll make some failures along the way, and away you go.

The best thing that happened to us was in the middle of a downturn in the market. We did not have the whole book, and we were still transitioning a number of clients. But we were on a fee-for-service regime in the middle of the downturn in the markets. We were getting paid the same from most clients as we were last year even though their account balances had fallen, but they needed us more than ever then. That's when I need the leadership. And when they acknowledge and understand and are reminded that they are paying a fee, they're more likely to take your call and say, "We do need. Get your head out of the sand; we need to have a chat about the drop in the investment markets here."

So taking that step in advance has been great from that perspective. We've had solid levels of income that continue. So those are probably the couple of main points.

Davy: I agree with everything you've heard from Gino and Greg and the way in which you will build a business. But whether it's fees or whether it's commission, it's all remuneration. It's all about getting paid for what you do. And your clients, as I said a few minutes ago, know you get paid; they're just not quite sure of the detail. You've got a great future before you, providing you recognize that change is on its way.

One of the things that you forget I think, that we all forget, is how good we are. How many people do you know who could walk into your home or your office, talk to you for an hour or two about your dreams, your hopes, your aspirations, your problems, your challenges and then after an hour or two, sweep those into his or her briefcase and go away? And then a couple of weeks later, come back and talk to you for another hour or hour and a half, two hours, and show you how you can start to solve some of the challenges you face? How you can meet some of the aspirations you have?

You won't solve it all in one meeting. You won't solve it all in one conversation. But you'll make a start. And then you'll walk out with a check for a few hundred dollars, perhaps a few thousand dollars. Or if it's capital investments, perhaps $50,000, $100,000, or even $1 million. But if it's a regular premium, you'll come out with a commitment from that individual to pay those hundreds of dollars or thousands of dollars for the next 10, 20, or 30 years. How many people do you know that could do that to you? I suspect not many. And yet that is what you do in your job every single day, every single week, every single month, every single year. And the fact that you get paid for it by commission, or the fact that you build a business through fees, which builds a very strong business and enterprise value as you've heard, doesn't really come into it. It's all about doing the job that you do. And you're good at it. You should be proud of it. And just make sure you see more people.

Now, I'll just finish on one personal note if I may. And that is that whoever you love, whenever you leave them, tell them you love them. Because the day will come when either you or they will no longer be able to tell them or tell you that they love you. So you make sure that whenever you leave anybody you love, you tell them you love them. You'll be glad you did.

Banks: I think for anybody looking to make that transition, your life will change from constantly looking for new clients to simply taking care of existing clients extremely well. The best message I was ever given was to learn how to shut up. We used to sit with a client and, so easily at the start of a meeting, solve the problem in a few words that they got. Now I hold back. I learned how to shut up, because that's something they're going to need to pay for in the future.

Audience Question: My question is to everyone. I'm curious how life insurance works in a fee-only model. How do you get compensated for the insurance under a fee-only model? And Greg particularly, what do you think the future of life insurance is in a fee-based model?

Gagne: So, I haven't made a change on that yet, but I'm going to have to figure that one out on Friday. Currently, I still sell life insurance, long-term care insurance, and fixed annuities outside of qualified plans. I haven't decided when I'm writing insurance in the future whether I'm even going to write it myself anymore, or if I'm going to refer it out to other advisors that are life insurance specialists at that point. It's a really awesome question.

On the future, I don't have a crystal ball, just like any of you, about what that is going to look like. If I tried to turn the tea leaves over, I think eventually, in our country, it will be discovered that some of these decisions that are being made were decisions that were probably not sound decisions. But that's just going to lead to re-regulation of regulation that didn't work. Just be prepared. These folks can probably speak to the whole life insurance issue better than I can because, and Caroline correct me if I'm wrong, I think they pretty much just about banned commissionable insurance, right?

Davy: It may happen, but at the moment, commission is still payable on pure protection. The latest figures that came out from the FCA, Financial Conduct Authority, our regulator, was that 26 percent of practice remuneration was still commission. So even in the United Kingdom, there's a recognition that protection still warrants a commission as a way of . . .

Banks: Without the investment content. That's the difference.

Davy: There's got to be no investment content. It's got to be pure life insurance. Pure protection. And if there's any investment content at all, then there's absolutely no commission.

Saggiomo: It's always an interesting one. We generally bake it into the overall project work for the client, depending on the levels of commission that are payable. There's probably no one real answer.

In terms of the future of insurance commissions in Australia, there's a big piece of life insurance reform that is coming out now. And I'd expect, given that companies aren't making that much money on insurance in Australia, there's going to be much more pressure on that in the future. So we just need to wait and see.

Banks: It's got to be built into the financial planning.

Gagne: It does.

Banks: I recognize, for the United States particularly, that potentially it could be a huge drop in income. We've got no choice on it.

Audience Question: I guess I have a comment, and I'm curious about your feedback in response to the comment. I agree with 99 percent of everything you guys said. There were just two things that kind of stuck out for me. I feel like so much of our value is having these relationships with clients, really connecting at a deep level, and being available to them in those down years and everything else.

So quantifying the value of things like peace of mind or all of those personal moments that we have trying to identify all of the dinners or the events as things that we provided to them would feel like, it would marginalize those experiences. And so, I wouldn't want to put those on some kind of a recap letter at the end of the year. And yet, there is intrinsic value with that.

So I guess the comment I would make is, in the United States, at least as we're transitioning toward putting these fee-based models in place. I strongly encourage everybody to continue to focus on using a percentage of assets under management as a way to determine the fee. And I know that it might be going away from that toward this fee-based aspect. I'm not saying you can't do both; I think it's great to do both. But at some point, maybe 30 years from now, we'll probably have percentage of assets under management no longer an option. And I get that. I think robot advisors and everything else will take us there. But for as long as possible, I think we are on retainer and our compensation deserves to be based on the amount of assets that we're advising on. That's the comment I would make. Just curious about your opinions related to that.

Banks: Our current regulator got an email just this morning where he's worried about what they call "contingent charging." So there could be some activity in moving into defined benefit pension funds for private plans. They are concerned about asset-based remuneration, possibly giving us the bias in giving the advice to move. So they actually want to see a fee for the advice, and they're quite happy for you to do the assets-under-management fee.

Some firms in the United Kingdom have moved to a very high level of fixed fees for assets. Something that could be welcome.

Gagne: Same. I would love fees to be able to remain infinitely. But always trying to be a little bit ahead of the curve here. I think the next wave of issues we're going to face is significant fee compression. One of my thought processes, which I have not executed on—it's just been up in thought-land for a couple of years at this point—is to Caroline's point, whether I just scrap the AUM thing altogether and just have a client-experience fee. You want to work with our firm? Here's the fee. Then we do any of the planning, all of the investments, just a fixed, high fee. Which also addresses the insurance thing. If we're using no-load insurance and stuff, I'll just bake it into my financial planning fees. If it has to go that way.

Audience Question: I guess this is a question to the whole panel. Just probably a quick answer. But if we're all doing the fee for service, that means we have to provide a level of service to every client each year. I just want to know sort of the maximum number of clients you think you can service or have the client base to do that on a yearly basis.

Saggiomo: We're looking at something like 200 to 250 per advisor. We're not there yet. I think there are two ways of looking at it. One is we charge a fee across the board and get volume that way. Or we could charge more and provide much better service. I think that's probably the way of doing it. But those are the numbers we've been looking at.

Gagne: That's a great question. As technology keeps advancing, the numbers may change, but in our experience in my organization, and we work as a team by the way, there are three advisors—myself and two other advisors. We don't work like you go get that client and you go get that client; we work together on all clients. For numeric per person, it's about 300 per person. We think that with the three advisors I have in the firm and then the three support staff underneath that we probably can manage in a boutique setting and stay very close to our clients and know who they are, and they know who we are, about 1,000. If technology improves greater than that, then we can maybe add on a little additional. But right now, based on the way we operate our firm, it's about 300 per person.

Banks: And I'm at 250.

Audience Question: We are kind of operating on the assumption that we're about maybe five or six years behind you and a couple years away from the banning of embedded commissions and fee-for-service standards in Canada.

This is to kind of continue your point. How would you justify, as you move up markets per a $5 million, a $6 million, a $10 million household client, charging a percent for the same level of work you might be delivering for somebody with half the assets? Where does that $100,000 get more service for a percent of assets under management?

Gagne: That's exactly where I think this fee compression problem is going to come in. If I have a $5 million client with $5 million of assets under management, and I have a $250,000 account, and they're both paying one percent, well then the larger client is subsidizing the smaller client. So maybe at some point the answer will be, but it doesn't have to be today, that this is going to be the fee of engagement.

Banks: I think Ken and I would probably take the fee, but we still carry for that higher amount the liability and the responsibility.

Davy: That is a really important point, Caroline, that goes back to the complexity of someone with $5 million is probably going to be greater as well. But certainly the responsibility that you have as an advisor, the risk is that much higher. And that in my view, it certainly justifies a significantly greater fee.

Caroline A. Banks, FPFS, of London, England, is a 28-year MDRT member with 23 Top of the Table honors who served as President in 2015. She is managing director of Caroline Banks and Associates, one of the first firms in the U.K. to be recognized with the prestigious Chartered Financial Planning designation.

Kenneth E. Davy, Cert PFS, FCII, is a 46-year MDRT member from Huddersfield, England. He is currently chairman and founder of the SimplyBiz Group which provides compliance and business support services to more than 6,000 financial advisors in the U.K. He holds the distinction of being the U.K.’s longest-serving MDRT member.

Gregory B. Gagne, ChFC, of Exeter, New Hampshire, is an 18-year MDRT member with four Court of the Table and nine Top of the Table qualifications as well as an MDRT Foundation Platinum Knight. He is the founder of Affinity Investment Group, an SEC-registered advisory firm that provides investment management and wealth distribution strategies.

Gino Saggiomo, CFP, is a 10-year MDRT member with six Court of the Table qualifications from Fortitude Valley, Queensland, Australia. By employing practical strategies to fully understand what behaviors are driving financial outcomes, Saggiomo has succeeded in helping everyone from mom-and-dad investors to company CEOs dictate terms to their own finances.


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