Making the transition to a fee-based business could be the most profitable business plan you will implement, says Brett Davidson, FP Transitions
Most UK advisers are addicted to up-front cash and commission. If your business remains dependent on this month's new business written to pay the bills you are not running a business but a sales operation, which is very different.
The transition to fees is about creating a real business cashflow to provide certainty and value for the business owner. Done well it will also improve the service offering and delivery to the customer.
There is a view in the adviser marketplace that while you switch from up-fronts to renewal earnings you must 'suffer' a major dip in cash flows for two or three years. I reject this completely and suggest that a new business plan should be created that leads to increases in earnings year on year while the renewal portion of the income stream is built up. To achieve this is not overly complicated.
What is a fee?
This is a major source of confusion within the industry. A fee is whatever you want it to be as long as it is transparent and spelt out clearly in pounds for the client. It does not matter if it is an hourly rate, a percentage of assets, or a flat fee determined on a value-based pricing strategy. It doesn't matter if it is directly paid by the client, or via the commission paid on any investment or product placement (as long as it doesn't vary by product sold; that is critical). It needs to be explained clearly at the outset so there is no confusion as to what the advice will cost.
Making the switch
Step one: Segment your client base
For your business to move forward it must know its client base; but it should also go further than that. The way service offerings are communicated to different clients within your business will need to vary as well. If this is confusing let's look at an example.
British Airways flies its customers all around the world, but the way it markets its first class, business class and standard class services varies considerably. Subtle changes aimed at each airline service has a big impact on success and profitability in each segment. The same principles will apply when you conduct your segmentation exercise.
Step two: Have a client value proposition
What will you do for clients that adds value and they will pay extra for? While choosing funds might be a part of your role, the work that clients value is the context around everything that you do. Value-added tasks you will perform include:
Portfolio design and management;
Ongoing review meetings;
Client education; and
Pensions advice and consolidation.
This can be packaged into a comprehensive value proposition for all clients.
Step three: Where you add value
One of the biggest impediments to transitioning an adviser business is simply that most advisers don't understand the value they add to their clients. Sadly we have all been brainwashed to believe the only thing of value in our role is the product we sell.
This is not true. We add value at various stages of the advisory process.
At the first meeting;
At the fact finding stage;
At the preparation and presentation stage;
At implementation; and
At the ongoing review meetings.
For once in our careers, past performance is a good guide to future performance. Look at the five best pieces of work you have ever done for clients. Review these cases and understand clearly the parts the client received value from, and most importantly the parts the client told you they valued highly.
Now turn these into anonymous case studies that outline;
The client's background information (age, income, investments etc).
The client's issues and challenges.
What you did (a few points on the advice and strategy you provided).
The results (what was then achieved, simplified, resolved for the client).
These case studies are great for clients, and also to help you see that picking funds was not the key benefit you provided.
Step four: A new charging methodology
If you have done the work to get to this point then re-visit your charging methodology and see if it really fits your new approach. In the past it may well have been that you only got paid when a product was sold and implemented. In the client's mind implementation certainly has value but so do a range of other areas.
Many clients also value ongoing advice and will pay you for it. The biggest criticism of our industry is that we sell 'stuff' to people and then never speak to them again until we want to sell them more 'stuff'. So give people what they want and you will find fee resistance diminishes significantly.
Don't develop a charging methodology that won't earn you what you need to earn to maintain and increase profits. If your new charging method will see you suffer through the next three years until the renewal income builds up then scrap it and design a new one.
Step five: All important first meeting
Now that you know what your offer is to clients (the value proposition), where you add value (the case studies), and what you will charge for advice, you will need to communicate it clearly in a first meeting presentation to new and existing clients.
At FP Transitions we use a 'first meeting storyboard' to do this and it answers the four big questions the client will have going through their mind:
a) Who are you?
b) What will you do for me?
c) What will I get for that?
d) What will all that cost?
Presenting this with plenty of time spent on asking the client what it is they really want will take about one or two hours, but by the end of the meeting you should have created a strong rapport with your client.
Design a presentation that answers these four key questions for clients and you will be 90% of the way there in communicating your value simply and easily.
Step six: Create a first meeting kit
At the end of the first meeting provide the client with something tangible that reinforces everything you have told them. If you don't they will forget. This could be as simple as a copy of the presentation slides you have used or a case study of a client who is similar to them showing the benefits of what you can do. This will increase your success rate on first meetings immeasurably.
Step seven: Use the new process with existing clients as well
Initially use the new process you have created on new customers only. I assure you it will only take two or three presentations to knock off any rough edges.
Once it is all working, use the new material to re-present to your existing clients when they are next called in for a review. Go straight into the first meeting storyboard you have created.
By following these simple steps you are giving yourself every chance of success in transitioning your business.
Speaking at Professional Adviser's conference
Equity release panel
Speaking at PA360
TISA's Peter Smith
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