anyone have a good resource for explaining the benefits to clients of fee based vs commission based accounts and why you use the fee based? Getting some pushback from new client (continued...)

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This is the exact reason why it’s annoying when fee only people claim they are always doing what’s in the “best interest” of the client. If a client would feel more comfortable in a commission account and isn’t going to make a ton of trades it probably is better over the long term.

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"I think fee based is better simply because we can buy/sell as needed without paying a commission to do so. It aligns you and I better so you know exactly what you’re paying me and when, and there’s never a ‘how much will this cost me’ discussion to have.” If you believe in fee based and this guy doesn’t he’s not a good fit for your practice. As a new advisor telling someone no is difficult, but if they’re not your ideal client don’t take them on, it’ll be better in the long run for you
***That being said, not every client is better off paying a fee. Someone who will buy trade once in five years is definitely better off paying a commission. I personally do both, but we’re all different.

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There is also the difficult to quantify benefit of working with a fee based advisor over the long term who has an incentive to earn their fee and continue to provide advice over the long term. The commission model may provide the mathematically correct model today, but there is little incentive for advisors to continue to service those accounts and provide planning, advice and behavioral coaching over the long term.

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FA1 I asked for help, not your complaint about fee only people. I didn’t come to you attacking your way of doing business so if you don’t have anything to contribute, have a great day. If commission based is in fact better, I’d like to see some numbers behind it. That’s why I’m asking if anyone has some resources or ACTUAL advice.

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Commission based is best for the foundation of their investments, the core things they will buy and hold forever. The fee based is more for things that required up keep like stocks, small cap, short duration, and cyclicals that will be traded often based on market conditions. That’s how I explain it to people that ask which is better.

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You ARE that source. If you are selling fee based account and don't know why you are, then thats a problem.

likesmart

I’m failing to see the problem... give the client the choice to begin with and do the commission account. It’s not your decision. It’s theirs.

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I think you don't want to bash either one. Focus on the benefit that the strategy, account type, or product offers and if they are still opposed to the fee structure, show them some alternatives using the opposite one

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He didn’t bring it to me. He was rattling off some numbers on the phone and I honestly couldn’t keep up. Like I said, I’m new and I’m human so I got a little flustered and told him I’d look into our commission costs because we never do commission based and get back to him. We are opening this account as a favor bc he is well below our minimum requirements. Now that I’m off the phone and have a clearer mind, I’m trying to do my own homework to learn something and be able to illustrate it correctly bc i frankly don’t think he was taking everything into account. I’m just trying to be as thorough as possible and If he’s right, I’ll shoot him straight. I’m just trying to get advice and some numbers from people with more experience.

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Alright sorry didn’t mean to be an ass. I know you’re new and if you guys only do fee based I assume you do more trading and active management in your accounts. I would just estimate how many trades you would do in the account annually and find out what the cost would be per trade and if that adds up to more than your annual fee then there’s your answer.

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If it's funds you ate using, look at the yearly expenses of a shares vs what you use for fee based. Usually it's a different share class that is much cheaper. Thing is they don't see the hidden fees but they do see your fees. Just an explanation of that and what else you bring to the table should suffice.

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A few things I talk about when I discuss the benefits of a fee based account vs a commission based traditional mutual fund portfolio
1. I tell the prospect/client that this is the way I invest my money. (Yes, I do have fee based accounts)
2. With a fee based account, I work as a fiduciary. (No conflict of interest with the investments I recommend. I’m not compensated any different on the types of investments I recommend to you.)
3. I discuss the difference between the best of 1 or 2 fund families vs. the best of thousands of funds/ETFs/stocks.
4. I compare a commission based account against a fee based account: Total cost of each option. Yes, the fee based has the fee, but has lower internal expenses vs a commission based account. It’s important to look at all costs to maintain each account option. Also, I look at the investment income each account throws off.
When we go over all costs, and the increased investment income, the difference between the two options is usually within 20 basis points. Sometimes, the fee based account even comes out ahead. I then show how a fee based account can take advantage of opportunities that may arise in segments of the markets. We can also buy and sell without having to consider the commission to sell and the commission to buy the new investment. 95% of the time, a fee based account has significantly more investment income. Mutual funds don’t do a great job of providing investment income
Remember, cost is only an issue in the absence of value. Show them the value you bring to a fee based portfolio

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OP, I think one can argue the benefits of both all day long. Ultimately, you have to define how you want to do business and, quite possibly, that definition may extend to how your client wants to do business. I do believe providing options will bring in more clientele and revenue during the early/middle stages of your career but I’m certainly not advocating to be everything to everyone. I’ve had great clients choose differing ways of conducting business and the experience has been pleasant. One thing I would advise is this: if you give the client choice don’t have one account that is fee and another account that is commission because one will do better than the other and one will have fees on the statement while the other will not. Don’t set yourself up for a compare and contrast where they lose sight of your value. 90% of my book is fee but the other 10% is still worth keeping because I enjoy the relationships and they are referral centers. Hope the article helped in some area of your practice.

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One thing that I don’t think has been mentioned is when you build a fee based practice, all of your time and attention moves towards service and away from transactions and products. The main incentive is how can I provide the most possible value and advice to each client so they continue to want to pay me an ongoing consulting fee. When I served as a compliance officer in a hybrid firm, the commission business seemed much more about how to generate a commission vs giving advice and adding value. The whole mission of the business/firm seems to change. I have an independent RIA that I own so some of that could be the situation I’m in but the difference is real.

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Hey OP I like to know how everything works and I find articles and such helpful, but nothing works better than doing the math myself. I had a client recently that asked me what was best and I diligently did multiple spreadsheets and hypotheticals on Morningstar to see it play out. They were typically below my advisory minimum and just high enough for a couple breakpoints with a long horizon needing minimum transactions. The math for he commission actually worked better in this case. My point is try doing the math yourself, it may help you internalize and create your own explanation for future clients. Good luck.

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Not a good client. Don’t take them on. Only onboard clients that fit your way of doing business and clients that take your advice.

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I agree with the Wells Fargo guy... but sometimes when your new it is hard, I’ve been there, but that being said, my worst clients are often the ones described here and tend to more of a pain in your ass and can take all that good gogo juice you need in this business. Keep doing your thing with only doing fee based. I think it’s not a good fit

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If you truly believe in the fee based model, you should let them know that you are strong in your conviction and if the prospect wants a commision based relationship, let them know you are not the advisor for them. That will probably get him to sign up. 😁

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Wow, so many more great responses. Thank you all! I’ll be reading through these and see what i take away from them and if I have any other questions!

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