By James Morris, Questar Branch Office Designated Supervisory Principal at Ann Arbor Annuity Exchange
Transaction-based or relationship-based? That is the question. Recently, “transactional” has become a euphemism for commission-based. On the other hand, “relational” is associated with a fee-based business model where the customer and the financial professional (FP) negotiate a fee, based on asset value and service provided. Although in either scenario a long-term relationship likely exists with a customer, a customer’s decision concerning account structure based on commissions rather than fees is an important discussion.
One of the arguments in favor of a fee-based business model is that a potential conflict of interest for compensation may be eliminated because the number of transactions does not necessarily increase FP compensation, and transactions are predicated on a fiduciary relationship that includes the customer’s best interest, with consideration to risk tolerance, time horizon, and other factors. As you may be aware, the topic of customer best interest is always relevant and currently at the forefront of the financial services industry.
So what does this mean for you? If you are an investment advisor representative (IAR), you are well aware of the benefits of structuring your business to include a fee-based portion. If you are not, it might be interesting to note a few of those benefits.
Fee-based business, by definition, should result in better client retention and a consistent recurring revenue to the advisor. The trend for many years among broker/dealers has been to promote fee-based business growth from their affiliated representatives, which has also lead to many IARs leaving broker/dealers to affiliate with registered investment advisors (RIAs). By transitioning to a fee-based business, the value of the advisor’s business can potentially increase because there would be additional services that could be offered by the FP and there would be a quantifiable, predictable revenue stream that can be associated with the business. Valuing a non-fee-based business is more challenging because the revenue may not be as predictable. Also, fee-based advisors tend to focus on long-term relationships with clients because they understand that routine contact with clients is not only a requirement, but also makes good business sense. As many advisors know, keeping a client is easier than getting a client.
But what if you do not have the registration to hold yourself out as an IAR? Should you take steps to obtain it? That depends on your goals and how you would like to structure your business. The benefits of offering a fee-based option can be appealing to some clients and the product offerings in the fee-based space are increasing. However, is having another sphere of responsibility in the best interest of your business and do you have a client base that would benefit from a fee-based structure? It is important to continue to evaluate your business objectively to ensure you are positioned for success.
If you would like to discuss your current business and future business plans, please call me.
James Morris | Designated Supervisory Principal
Questar Capital Corporation Branch Office at AAAE
Ph: 800.321.3924 x159 | Dir: 734.786.6159
Securities offered through Questar Capital Corporation (QCC). Member FINRA/SIPC. Advisory services offered through Questar Asset Management, a registered investment advisor. Ann Arbor Annuity Exchange is an affiliate of QCC.
Designed for Financial Professionals.