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Switching from Commission-Only to a Hybrid-Advisor Model: Is it right for you?

Posted by Lori Fogle on Wed, Mar 11, 2020 @ 12:00 PM

Which is “better,” commission-only or a hybrid (fee and commission) model, is the wrong question to ask. Even though the DOL rule did not take effect, the regulatory environment is constantly evolving and it can cause us to think along these lines. However, one model isn’t necessarily better than the other, but it’s a decision many financial professionals are faced with should I make the switch to a hybrid model?switch-hybrid-advisor

In our experience working with thousands of financial professionals over the years, you can scale and grow your business more effectively by switching to a hybrid model where you can be paid either commission or by a percentage of assets under management (AUM), which is a more consultative model. However, if that’s not your goal, it’s completely fine.

Not everyone is looking to expand their business. Maybe you don’t believe in charging a fee or you are looking to retire soon and don’t want to mess with making a change — all well and good, but this blog post is for those who ARE considering their options.

So, you want to be a hybrid advisor

A hybrid advisor is defined as: an investment adviser representative (IAR) registered with both a registered investment adviser (RIA) and a broker-dealer. This allows the advisor to maintain a commission- and fee-based practice, or what's known as a hybrid practice.

You may have seen that financial advisors who charge a fee for assets under management (AUM), a flat fee, or an hourly rate refer to themselves as a “fiduciary.” This can be a big step and a change the way you view yourself and the way others view you (especially regulators).

You’re probably familiar with the term after the DOL introduced this word to the entire industry, but just in case you’d like a refresher:

A fiduciary is a person or organization that acts on behalf of another person or persons to manage assets. Essentially, a fiduciary owes to that other entity the duties of good faith and trust. The highest legal duty of one party to another, being a fiduciary requires being bound ethically to act in the other's best interests. A fiduciary might be responsible for general well-being, but often the task involves finances—managing the assets of another person, or of a group of people, for example. Money managers, financial advisors, bankers, accountants, executors, board members, and corporate officers all have fiduciary responsibility. (Investopedia)

Essentially… you will be required to act in their client’s best interest.

Contrasts between commission-only and "hybrid"

Now, you may have always acted in your clients’ best interest simply because it’s what you believe is right (you never had to be told), but when you start charging a fee for some or all of your earnings by providing financial advice, it is official and requires that you hold yourself to a higher standard (or face the consequences).

Who else is a fiduciary, outside our industry? Doctors, attorneys, and CPAs.

The financial industry as a whole seems to be moving in this direction. And with that — the transactional sales relationship can wither on the vine while a consultative advice model flourishes.

This is not to say that an insurance agent who is paid commission is a thing of the past. Not at all. But they are confined to performing a very narrow task.

A hybrid advisor or hybrid investment advisor representative (IAR) on the other hand, can offer clients a more comprehensive financial strategy. Rather than having just one piece of the puzzle, you are able to assess the entire financial picture. You don’t have to refer the client outside of your circle if you don’t want to but instead, add more value within your firm and/or the partners you’ve chosen to work with who align with your values.

For someone who is tired of the get out there and grind method of doing business, the transactional model may not be right for you anymore. Constantly trading your time for dollars and being in selling mode is not for everyone. However, that doesn’t mean that if you switch to a hybrid-advisor model you just get to sit on your laurels and collect payment — far from it. In the coming years, it’s likely there will be even greater scrutiny around the value being provided by advisors collecting a fee for services.

But we could assume that those are the type of results you want to provide. And can you put a price on getting a person’s entire financial life in order? We don’t think so. As a society, it would be great if we could get away from this idea that we have to work ourselves into the ground hustling in order to make a good living or be worthy of charging a fee for the services provided.

It’s possible to deliver just as much benefit (and maybe even MORE) by NOT doing that. The true definition of a business is having systems in place so that you don’t have to constantly be tracking down the next sale. Instead, you can concentrate on improving the lives and finances of existing clients. That’s what a hybrid model allows you to do.

As we explain in this eBook, you don’t necessarily need tons of clients to have a successful business – you need a select few that you take care of exceptionally well and who want to do even more business with you and refer you to others.

Imagine having more flexibility over your time and compensation… maybe you get paid commission on some products and then charge 1% on AUM, maybe you charge less or more – it’s up to you. Just remember… you still have to earn it! Recurring revenue just means you don’t have to scramble wondering where your next paycheck is coming from, you just have to do more for the clients you have.

Switching to this model means you can switch off selling mode sometimes and focus on client relationships.

Think about what this would do for your peace of mind – being able to more reasonably predict and plan for a certain amount of income versus not knowing where the next sale is coming from (more predictability = less stress).

Time to take action

Now you can build a business -- one that can operates without you working IN it 24/7. And the value of your business would typically be more as a hybrid advisor because you apply a multiple to your revenue which is how you value the equity in your business. With residual revenue this can mean a higher number to apply the multiple to. That way, if you ever want to sell your business – you’ve just increased your chances of getting more for it.

But there may be a couple of sticking points that have you worried. So, let’s address those head on.

1. Where do I even start if I want to transition to a hybrid model? If you don’t have a lot in savings, then you may want to make a gradual switch and do a combination of commission and fees at first. But there are a few steps you need to take to even be eligible to charge fees.

· This might seem odd, but making this switch actually starts with a mindset shift. Some financial professionals may believe they aren’t providing enough value to get paid an ongoing fee. This issue is twofold. On one hand, you might need to step up the value you provide. On the other hand, it may be that you have a case of imposter syndrome where you incorrectly devalue what you offer and the outcomes you provide. Having the mindset of a fee-based advisor means you understand and believe in the results you’re providing on an ongoing basis. And this doesn’t have to be entirely investment results… it can also be about helping a client create a plan, understand their financials, and actively monitor them so they make changes where appropriate. Without the help of an advisor, some would never accomplish that. If you were to provide an incomplete solution, or just one piece of the puzzle, you couldn’t fully help them do this.

· You will need to become an Investment Advisor Representative as part of a Registered Investment Advisor Firm (RIA) OR start your own RIA.

· You’ll need to obtain your Series 65. And you may also want to become a CFP®, which requires multiple college-level training course, a 6-hour comprehensive exam, and 3 years of experience working with people’s financials.

· It makes sense to create a written process for your firm to use going forward. What this does is provide a consistent experience for your clients and helps you deliver the ongoing support required of a fee-based advisor.

· Think about what makes you different. Yes, we’re serious, this is something you need to do. As this space becomes more crowded just stating that you’re a “fiduciary” isn’t going to be enough. There will likely come a time where that’s standard. So, what is it that would make you the suitable choice to help your ideal client? Being able to articulate this is how you de-commoditize yourself.

· Understand that switching could mean a step back in income initially. If you’ve gotten used to large upfront commission payments, it will be an adjustment. And that could make you reconsider your decision, but we’d encourage you to think about it the same way you ask your clients to save for retirement. There’s never a perfect time to start putting aside money, right? So, it’s best to start now to prepare for the long-term.

· Consider the opportunity costs of putting off making the switch. If that’s really what you want to do, waiting will not be your friend. You have to start now. Take a look at this comparison from Michael Kitces blog. As you can see, year 6 is the tipping point where your fee-based AUM model would start shooting past the commission model. But you never get to year 6, if you never start.

Commission vs Fee based income

2. What are my clients going to think about me moving to a fee-based model? Well, that’s going to be largely dependent on how you approach them with the change. Here’s how we would suggest making the transition to properly prepare your clients.

· First, rework your value proposition to demonstrate to your clients whats-in-it-for-me (WIIFM). Meaning, what do your clients get out of you making this change? You obviously can’t switch to a fee-based model just because it’s better for you. Think about why it will be better for your clients (or at least some of them).

· Determine who will be a fit for the new model and who you may need to let go. Again, if you can’t provide ongoing value when charging a fee, then it could be best to let those clients go. Those that you would like to make the transition, you’ll need to notify them of the adjustment in your business model and offer them an opportunity to take advantage of the change – such as a new service you’ll be offering now (this might help get them on board with the changes quicker and with more enthusiasm). The main thing is to Document, Document, Document these communications.

Next steps

Whether you want to remain commission-only or switch to a hybrid model – there’s a good chance we can help you take your financial practice to the next level. We work with agents who fall within this spectrum.

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Tags: practice management



This content is for informational and educational purposes only and is not designed, or intended, to be applicable to any person's individual circumstances. It should not be considered as investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action.

Partners Advantage a Gallagher Company (Partners Advantage) is not a registered investment adviser (RIA) as such Partners Advantage does not directly offer the concepts discussed.  Partners Advantage has business relationships with RIAs and independent contractors for the purpose of wholesaling fixed insurance products to their financial professionals for which Partners Advantage receives compensation. Partners Advantage is not responsible for any claims or actions brought against financial professionals who independently make the decision to become financial advisers or implement the concepts suggested.