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Transitioning your Financial Advisory Practice to a Fee-Based Model (Without Losing Revenue)

The conflicts of interest within embedded compensation models are well known, but how can you actually get away from it and maintain a stable and comfortable revenue stream? Today’s guest mastered his business’ transition to a fee-based model, and he’s on a mission to share what he’s learned with other advisors. 

Adam Chapman is a native of London, Ontario, where his practice is currently located. He completed his B.ACS at Western University, back when it was UWO, and has added his CFP and CLU designations since starting his business back in 2005.

Adam focuses on retirees and people who are about to retire. He’s paired this niche audience with a business model that has him focused on switching his services over to an almost exclusively fee-based and fee-for-service offering in the next one to two years. 

What You’ll Learn in This Episode: 

  • Why a young advisor like Adam is the perfect fit to work with retirees (3:45)
  • Adam’s transition to a fee-based practice (7:10)
  • Adam’s process for wealth management (17:15)
  • The psychology behind transitioning to retirement (22:00)
  • Why Adam has left behind the transactional model of financial planning (26:20)
  • 3 compensation mistakes Adam sees other advisors making (34:05)
  • How the delivery of financial advice is evolving in Canada (42:50)

Links and Resources: 

Yes Money

Email Adam 

Quotes by Adam Chapman: 

“It didn’t seem fair that I have to take a pay cut just to do what’s right for the client.” 

“That fear of running out is what prevents people from using the money.” 

“If we can help clients step out of their comfort zone a couple times in retirement and do something they never thought they could ever do, that’s phenomenally motivating and powerful for me.”

Over the last three years, Adam has entirely switched his practice over to being 100% fee-based. This unique experience, along with his insight into the psychology of retirement, has brought advisors to him asking for advice about running their own fee-based practices; today, he’s sharing these insights with you.

Below, we’re covering three key ideas from this episode:

  • Transitioning to a fee-based practice
  • 3 compensation mistakes Adam sees other advisors making
  • The psychology behind transitioning to retirement

Transitioning to a fee-based practice

About five years ago, Adam became frustrated with his commission-based compensation. Since he works with retirees, he was helping clients take money out of their accounts to spend, but his compensation was supposed to come from selling products— which at this point in their lives, his clients often didn’t need.

“It didn’t seem fair that I have to take a pay cut just to do what’s right for the client,” he says. So he quit cold-turkey, and in the last three years, he switched to his business being 100% fee-based.

While he expected to lose some income through the transition, that hasn’t actually been the case. For one thing, his clients seemed much happier once he educated them about how the fee helped him remove bias from the equation.

His client engagement also increased significantly. In the past, his clients would sit on their questions, not wanting to call him to ask and risk being a bother. Instead, it would all come out in an annual review meeting, at which point it would be too much to address all at once.

Now that clients see the fees they pay him, they feel more comfortable reaching out to him more often—the fee raised the level of engagement and spurred more referrals, which actually made his revenue increase and become more stable.

3 compensation mistakes Adam sees other advisors making

While Adam has found great success with his compensation change, there are certain pitfalls you should take care to avoid.

Dropping fees to low

This is all about confidence; if you don’t understand and acknowledge the value you provide to clients, you’ll have a hard time charging them what you’re worth.

Niching down helps—people are much more willing to spend money on expertise rather than general financial advice. Concentrating on retirees and soon-to-be retirees increased Adam’s confidence, helping him feel like his offerings were worth what he charges.

Hint: To get a sense of what his clients would experience with his new pay structure, Adam hired a business coach and paid the same fees that his highest net worth clients would be paying him. This helped him understand what it means to get value for that kind of money.

Having a complex compensation structure

Giving clients too many choices can muddy the waters and cause both them and you to overanalyze the options.

Instead, Adam offers the exact same services to all of his clients, even though he charges them different amounts based on their portfolio.

How can you justify charging clients different fees for the same work?

Keep in mind that you’re charging your clients based on what it’s worth to them. Your services have a higher impact on a higher net worth client than on someone who has a lower net worth (who is paying less money, but perhaps a higher portion of their income). When you think about value for the client, it makes sense that some pay more for the same service.

Calculating a rate based on hourly pay

While it’s not the same as embedded commission, an hourly rate still has an element of conflict of interest—the client would obviously love to pay less while you might prefer to spend more time on their plan so that you earn more money. Hourly rates are also not a good measurement of the value you provide.

Instead, Adam recommends figuring out your operating costs to determine what your breakeven cost per client needs to be so that you can keep the lights on and pay yourself and your staff. That will help give you an idea of the minimum you need to charge to provide the service you offer.

The psychology behind transitioning to retirement

While many people expect retirement to be a smooth and seamless transition into bliss, that’s not the experience of most retirees. For this reason, Adam insists on speaking frankly with his clients about the realities of retirement to help his clients prepare.

The reality of entering retirement

It’s easy to forget that retirement is a time of loss—the loss of structure and camaraderie when leaving the workplace, to start. In Adam’s experience, it can take three to five years for someone to settle comfortably into retirement. And later in life comes further loss of family, friends, and spouse. It’s critical to be aware of—and prepare for—these coming changes.

Hint: Recognizing a need in his niche, Adam decided to receive training in bereavement and palliative care. Consider the needs of the clients you serve and whether you can get additional training in divorce, entrepreneurship, or whatever else might be relevant to the clients who make up your nice.

Getting accustomed to decumulating

Because people tend to be quite worried about having enough money in retirement, Adam has noticed that most of his clients are actually saving more than they need to retire comfortably.

And that transition—from accumulating to decumulating—takes some getting used to. Adam wants his clients to get used to it sooner than later so they don’t regret not spending their money, on themselves or on their family, later in life.

He helps clients focus on what really matters to them: getting value out of what they’ve saved in the form of a lifestyle they can enjoy. Sure, he worries about things like rate of return and tax savings, but that’s in the background—the explicit goal is to help them make the most of what they’ve earned and saved.

Hint: For another perspective on retirement income planning, listen back to our episode with Howard Dixon on the art and science of retirement income planning.

Personally, Adam’s goal is to get his clients to step out of their comfort zones at least a few times in their retirement; he wants them to get uncomfortable—whether that means paying for a Disney cruise for the whole family or a treat just for themselves—because those are always the experiences his clients cherish the most.

To learn more from Adam, including why retirees are his perfect fit as clients, why he’s not too concerned about growing his business too quickly, and more, make sure you catch the full episode. You can find the show here on this page, or subscribe on iTunes or Stitcher so you don’t miss any episodes.

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