Thinking of Going Fee-Only? Signs It’s Time to Make the Move

Fee Only Advisor

The draw toward the fee-only world has grown in recent years, with the number of advisors going fee-only steadily on the rise. Incentives such as greater flexibility in serving clients, increased acquisition opportunities, and an attractive compensation structure are motivating many advisors to drop their FINRA licenses and embrace the 100 percent advisory service model. In fact, Citywire reported that nearly 13,000 SEC-registered investment advisers were serving roughly 43 million advisory clients in 2019, an increase of 3.3 percent from the previous year.

But how can you know if making the move to fee-only is right for you? Consider these pros and cons—and remember, timing can be everything.

Some Clear Advantages

The fee-only model offers obvious pluses for you, your current clients, and those you hope to serve in the future.

1) Fiduciary status. Being able to present yourself to clients and prospects as a pure fiduciary has tremendous appeal. It’s a clear acknowledgment that you act in your clients’ best interests and provide them with objective advice—something clients increasingly expect as they become better versed in the various financial advice models available to them.

2) Transparent compensation. Unlike the commission world of registered representatives, the compensation structure for fee-only advisors is aligned with client interests. Clients pay an asset-based (or flat) fee for services received, so they know where their money is going.

3) Regulatory flexibility. As an RIA, you’re subject to SEC and state regulations, not to FINRA. Dropping your FINRA licenses means fewer continuing education requirements. And, you generally benefit from shorter disclosures and a less-frequent audit cycle.

4) Marketing freedom. Going fee-only brings new marketing potential as well—in what you say and how you say it. You’re not subject to the same restrictions in how you present what you do. And, as a fiduciary, you’re able to promote a philosophy that appeals to potential clients.

5) Succession opportunities. Being a fee-only firm can open new M&A and succession doors, too. RIAs looking to sell their businesses are more likely to engage with another RIA than a firm with a solely broker/dealer attachment.

What’s the Downside?

Given these advantages, you may be wondering about the challenges of going fee-only, too. Here are a few things to keep in mind:

1) Infrastructure needs. Added freedom and flexibility means greater responsibilities—from building out infrastructure to vetting technology and service providers.

2) Compliance risks and costs. As an RIA, you assume the added costs, responsibilities, and risks of running your own compliance, including drafting advisory agreements, completing regulatory filings, and hiring the proper legal help.

3) No commission-based products. The ability to choose the right products for your clients is one of the advantages of operating as a fee-only advisor; there are certain products, however, such as most variable annuities and some alternative investments, you’re no longer able to offer because they’re commission based.

4) Emotional attachments. When you relinquish your FINRA licenses, you also give up the ability to retain any upfront or trail commission compensation. It’s possible you may also have to end relationships with some of your commission-account clients if they’re not good candidates for an advisory account solution.

Your Timing and Partner Matter

If, after weighing the pros and cons, you decide a fee-only model is right for your business and your clients, when should you make the change? These benchmarks may signal the time is right:

  • You no longer sell commission products.

  • At least 90 percent of your current book is advisory business.

  • You have low trail revenue (10 percent or less recurring nonadvisory revenue over the previous year).

Before taking any steps, though, be sure to talk with your staff about your plans for going fee-only. Getting buy-in early goes a long way toward making the transition as seamless as possible for your business and your clients when the time comes.

Choosing the right partner will be key, too. You’ll want to explore the affiliation options they offer, as well as understand exactly the kind of support they’ll provide and how they’ll help you serve your clients. Remember, there’s no one-size-fits-all model—it really comes down to the option that works best for the type of practice you have now—and your vision for where you want to take it in the future.

This material is for educational purposes only and is not intended to provide specific advice.

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