Building a fee-based independent practice

Having an independent practice is an aspiration for many advisors, and fee-based services have appeal for many investors. But combining the two with a fee-based independent practice isn't easy. Wealth Professional talks with Thomas Venner, an advisor building a fee-based practice in Southern Ontario.

Commissions for wealth-management products are often derided in the media and may potentially face more stringent regulations. However, they remain the standard source of compensation in the industry.  Wealth Professional caught up with Thomas Venner, an advisor who is building a fee-based independent practice in Southern Ontario’s Golden Horseshoe region. He talks about the challenges and benefits of a fee-based practice.

When did you decide to become an advisor and what attracted you to the business?

I became an advisor six years ago. I began taking the CFP courses at a local college while I was still working in medical research, I have a masters in biochemistry. I had become self-directed investor in the late 90's and had done quite well during the recession in the early 2000's. When I came into a fairly substantial unexpected cash windfall I decided I should educate myself more fully in the area of financial planning and asset administration, thus the courses. When the employment situation deteriorated in the research field I opted to make a career change into something that I not only enjoyed, but was a necessity. 

Did you start as a commission-based advisor and switch to a fee-based model?

Yes, this is realistically the only way to make a living as a new advisor. Even now I have somewhat of a hybrid business model. I offer fee-only financial planning but also manage assets. The last six years have provided a rather difficult economic environment and have been very challenging with regards to building revenues and finding clients.

What are the particular challenges faced by fee-based planner?

I try to offer sound financial advice at a reasonable cost. I see many planning firms that charge over $2000 for a plan. I find the majority of people will balk at this expense unless they are high-net-worth clients. I'm aiming at the mid-market and provide segmented planning options in the $300-$500 range. This usually includes portfolio analysis, retirement income projections and risk management assessment. I have never had a client ask for a complete comprehensive plan, if I did I would probably charge a bit more. So generating income from fee-only planning is an issue.

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This is compounded by the fact that not a lot of people are looking for this service. I get the majority of calls from people who read Moneysense Magazine and have found me through their website. Some call come from my website, which focuses on fee-only and fee-based financial planning. I only get one or two calls a month. Doing the math, you can see the challenge of making a living as an independent fee-only financial planner.

What are the advantages of this model? What makes the fee-based model more appealing to you?

The biggest advantage of being completely fee only would be not having to worry about investment performance and the compliance associated with asset administration. I would be able to give general advice about investments regarding asset allocation and leave that up to someone else. The client benefits because they know my advice is not based on what I might make in commissions.

How should a client decide whether or not they would be better served by a fee-based advisor rather than a commission-based one? Is there an asset threshold that an individual needs to reach before a fee-based model becomes cost effective?

That really depends on the level of service the advisor provides and how transparent they are about fees. Some advisors only do asset administration and do not provide additional advice about tax and estate planning, risk management, budgeting, mortgages etc. I explain to my clients that the "trailer fees" they pay are for advice from the advisor. If they get no additional advice they are paying these fees for nothing. It is always prudent for a client to seek an advisor that will look for cost-effective investment options but who also provides financial planning and an Investor Policy Statement.

Personally, I think clients with $250K and up may be better served using a fee-based planner.

The OSC is considering new regulations on such things as trailing commissions, possibly requiring greater disclosure and perhaps even banning them. How do you view the debate, and would regulatory changes have any impact on your business?

Personally I am well positioned as many of my larger clients have come to me as a result of the fee-only planning I provide. They know exactly what they pay in fees and what service I provide. For most of these clients we use flexible fee arrangements where the "trailer fee" they pay me is specified in the contract.

My smaller clients use traditional fee arrangements, predominantly through mutual funds, but have a clear understanding of the fees and what I offer them with regards to financial planning and advice. I think banning them would provide a disservice to the smaller clients as independents would no longer be able to keep them on their books, they would likely end up at the banks and get no financial planning advice.

I agree that greater transparency is required regarding fees, but the emphasis should be on the value the clients receive for the fees. I also think that more-stringent requirements are required as far as advisor credentials. I think advisors need to have a professional designation such as CFP or CFA, much like accountants. This would weed out a lot of the salesman types that don't provide adequate planning advice (i,e,: earn their trailer fees).

What advice would you offer advisors who are considering building an independent fee-based practice?

The biggest challenge is finding clients. I think more people are getting educated about the need to use a fee-only planner but the question is how do you help them find you? Websites and other social media are the obvious way but I have personally had limited success. I do know you will need to have patience, perhaps you can generate income in other ways while you build the fee-based part of the business. I do this by doing tax returns, insurance sales and brokering the odd mortgage.