Following - Vanguard Canada · actually have an awakening to realize you’re prepared ... CRM2 alone. Many successful advisors have recognized that this transition is an opportunity

Followinga new pathA practical guide to transitioning to a fee-based model

For financial advisor use only. Not for public distribution.

For financial advisor use only. Not for public distribution.2

ContentsIntroduction 4

Workshop 1: Asking questions

Step 1: Get real 12

Step 2: Craft a vision 14

Step 3: Take stock 16

Step 4: Create timeline 20

Workshop 2: Laying the foundation

Step 5: Involve team 22

Step 6: Structure investments 24

Step 7: Structure service model 28

Step 8: Define transition mix 32

Step 9: Assess economics 36

Workshop 3: Implementing change

Step 10: Refine messaging 38

Step 11: Meet with clients 42

Step 12: Execute transition 44

For financial advisor use only. Not for public distribution. 3

Lessons from your peers who’ve made the switch to fee-based

“ I think you really have to have a very strong vision of exactly how you want to run your practice.”

“ You need to want to make the change. It’s like quitting smoking or losing weight. You need to actually have an awakening to realize you’re prepared to make that change.”

“ For some clients, it just wasn’t the right thing for them. Then that’s where you have to decide what your practice is going to look like and who you’re going to engage with, because I think it’s very difficult to do both.”



Thereality

Thesolution

Theproblem

Theopportunity

Introduction



The realityOne of the many consequences of the second phase of the Client Relationship Model (CRM2) regulations is that it has forced advisors to think long and hard about how they define, deliver and communicate their value.

It's accepted wisdom that fee transparency is a non-issue if you believe, and your clients agree, that you're delivering significant value. Driven partly by this changing regulatory environment, an increasing number of advisors are assessing whether the best approach would be to start or to hasten a shift to a fee-based business.

The opportunityIncreased interest in operating with a fee-based model is not the result of CRM2 alone. Many successful advisors have recognized that this transition is an opportunity to more clearly define, defend and leverage their value as well as a way to build deeper trust with clients. In fact, fully 86% of the advisors who contributed their thinking to this guide said that a transition to a fee-based business had a positive impact on client trust. Those advisors are transitioning to a fee-based model not because they feel they have to but because they believe it’s right for their clients and their businesses.

The problemWhile many advisors have considered or already started the transition to a fee-based business, it's hard to know where to begin. The process can be daunting. The mechanics of making the switch may be straightforward, but many advisors worry about the financial impact on their business, how and when to approach clients, and how to explain the transition.

The solutionThere is no single source of information on how best to make this transition. But when you talk to enough advisors who’ve gone through the process, certain patterns emerge. They’ve learned what works and what doesn’t. Each has implemented specific steps that have helped them succeed. This guidebook brings together the thinking of 50 advisors who’ve successfully transitioned all or some of their business to a fee-based model. It outlines the common and successful approaches and incorporates direct input from your peers to provide you with a clear path forward.

successfully transitioned

advisors

report positive impact on client trust


Methodology and participant profileVanguard Investments Canada Inc. partnered with Toronto-based financial industry consultant Julie Littlechild who, in 2015, conducted in-depth interviews with 50 Canadian advisors, all of whom had completed the transition to a fee-based business. The participants reflect a broad range of experience with respect to when and how quickly that transition was made and all believe strongly that the process has had a positive and meaningful impact on their businesses. As Figure 1 shows, 54% of participants managed more than $100 million in investable assets.

The participants' pathsFigure 2 shows a quarter of respondents have transitioned 100% of their business and the rest are somewhere along the path. Figure 3 shows that 29% of respondents had no plans to transition all clients in the near term.

About our survey


0% 10% 20% 30% 40%

<$50m

$59–$99m

$100–$249m

$250–$499m

No response

13%

26%

35%

19%

6%

0% 10% 20% 30% 40%

Already 100%

Yes

No

39%

32%

29%

0% 10% 20% 30% 40%

<10%

10–24%

25–49%

50–74%

75–99%

100%

6%

3%

6%

23%

26%

35%

Source: Data from survey by Julie Littlechild of 50 financial advisors in Canada on behalf of Vanguard Investments Canada Inc. in 2015.

Figure 1. What are your assets under management today?

Figure 3. Do you plan on going 100% fee-based over the next couple of years?

Figure 2. What percentage of your book of business have you switched to fee-based?

7


Belief in transparency

for clients

Focus on relationship

building

Alignment of advisor and

client interests

Reduced cost for clients

Industry trends in this direction

Greater sustainability of

the practice

Common motivations behind the decision

The participants were spurred to take action for many reasons. However, there were 12 common (and often overlapping) motivations to transition to a fee-based business:


The collective experiences of the advisors we interviewed helped inform our thinking on not only why an advisor may transition part or all of their book of business to fee-based but how.

Why is where you'll start. By focusing on the bigger picture, you'll examine why you're making this change and how it will fit into your overall plan for the business. Before doing anything else, you need to understand your "why," your beliefs and your assumptions. Only then can you craft a vision for the future of your business.

How do you get there? You need to undertake the analysis required to understand the implications of the transition. That involves examining your business, your portfolios and your clients’ perception of the value you provide.

Next, you need to work with your team to define the timing of the transition. Together, you’ll map out how you’ll manage client relationships, focusing separately on client portfolios and client service. By defining these aspects of the client experience, you can also finalize your fee schedule.

This is where things get sobering. You need to draw up specifics on the transition plan, including a clear understanding of the impact on your revenue and your approach to communicating the transition to clients. Only then will you finally be ready to present the plan directly to your clients.

Finally, the t’s must be crossed and the i’s dotted. You and your team need to complete all necessary paperwork associated with the transition.

9

Before you begin

Consistent income stream for advisor

Reduced client and

business risk

Ability to deliver an institutional-

level offer

Improved tax efficiency for

clients

Focus less on investment performance; more on value to clients

Service efficiency


Your path

10

Drawing on input from all survey participants, Vanguard Investments Canada Inc. developed the following path to change your business. There are 12 distinct steps with most of the work taking place before you begin to communicate directly with clients.

On the following pages, we’ll review the details of each step, incorporating key actions and input from your peers to help you take meaningful action. At the end of each step, you’ll be directed to an accompanying worksheet with questions and checklists to help you track your progress in making the switch to fee-based.

Get real

Craft a vision

Take stock

Create timeline

Involve team

Structure investments

1 2 3 4 5 6


Structure service model

Define transition mix

Assess economics

Refine messaging

Meet with clients

Execute transition

7 8 9 10 11 12

For financial advisor use only. Not for public distribution.12 1Step 1: Get realStart the process by understanding your

’why’ and identifying potential obstacles

to your success.

Workshop 1: Asking questions covers Steps 1–4

1For financial advisor use only. Not for public distribution. 13

Know your purpose for transitioning to fee-basedAdvisors who've already made the switch are very clear about one thing—converting to a fee-based business needs to reflect a deeply held conviction that this is the best thing for your clients and for your business. Lacking that conviction, they suggest, will almost guarantee you won’t reach your goals.

Those who were among the first to switch felt strongly that a commission-based transactional model was not in the best interests of their clients. And while some advisors point to the fact that regulatory change may make the transition inevitable, a majority feels strongly that the transition was necessary because it was in the best interests of their clients. A clear conviction, they said, will ensure that your communication to clients is authentic and will sustain you through a potential initial revenue decline.

Peer insights and ideas

“Probably the main thing is just to have confidence that what you’re doing is the right thing. If you don’t have conviction, no one is ever going to pay you a fee. You don’t deserve it.”

“If you want to go through this, you have to be honest with yourself and you have to have conviction in the process that you put together. The whole reason you do this is because you think it’s going to provide the client with the best scenario, the best opportunity. You’re putting the client’s interest first; you think it’s going to be more beneficial for the client. So for me, when I present, when I show them the fee-based way of doing things versus transactional … I would say about 95% of the time there are no questions from the client.”

Understand the internal barriers that might be holding you backMany participants highlighted the internal barriers that, if not fully acknowledged, can impede your progress. Those barriers might include a lack of clarity regarding the value you provide or fear of client reaction to fee transparency.


“The first step was just to get over the hurdle and convince yourself of your value.”

”For an advisor who has never before given a good level of service and who wants to transition to a fee-based practice it will be hard to tell the client, ‘Starting today, we'll increase the level of service, which we've never done before.‘ ”

“I think the main reason most people haven’t made the transition right now is because they lack resiliency and self-confidence.”

Answer the questions on the accompanying worksheet to help you clarify why you’re planning to switch to fee-based. Only you can assess your level of confidence in the value you bring to clients and your readiness to change how you’re compensated for your services.

Take action

For financial advisor use only. Not for public distribution.14 2Step 2: Craft a vision Reimagine your business, the work you

want to do and for whom.

Workshop 1


Answer the questions on the accompanying worksheet to help you map out your offer and your target market. You’ll think about the type of clients you want to serve and set criteria for accepting new clients.

Take action

15

Define your offerAs you think about this transition, review and refine your offer so you can clearly and concisely communicate the value that you deliver to your clients. For example, do you provide financial planning? If so, what's the scope of that service?

Define your ideal clientIdentify the clients with whom you want to work—those who value the services that you will provide and who energize and inspire you. Set clear goals for the type of client you will accept into your business going forward.

Determine how a fee-based approach fits into your overall visionWhen thinking about your vision for the business, determine if you'll only work with clients who are open to fees or if you'll present this approach as an option.


“We do global family wealth leadership, and we make sure people are financially organized. So basically most of our clients are very busy with their business and their family and the other things that they like to do in life, such as skiing or golfing or travelling or whatever. Our job is to make sure that we do a whole wealth review. So it’s far more comprehensive than just simply the portfolio management. We look at all the different asset classes and make sure that the whole wealth plan is in balance.”

“We try to service our clients very well. We started a monthly newsletter to let people know what we’re doing inside the accounts, what our views are, how we’re positioning, and so on. The other thing is reach out and say, ’How are you doing?’ every now and again. We want to provide a lot more value than just the investment management side. It gives us time to do a lot more financial planning, to do a lot more high-level estate planning and tax planning. We can offer a higher level of service to clients when we’re not talking stocks all the time.”

the whole wealth plan in balance

For financial advisor use only. Not for public distribution.16 3Step 3: Take stock Assess your business, portfolios and

clients to determine if there are any

gaps that need to be filled prior to

starting a transition.

Workshop 1


Assess business readinessBased on the offer you want to provide and your ideal client, identify any potential gaps, including such things as professional designations, skills, team structure, new team member or internal/external partnership requirements and licensing.

Assess portfolio structure and costs, by client, to understand the impact of a transitionConduct a detailed analysis of each client, identifying what they’re paying today (including embedded costs) compared with the cost going forward, and outline a transition plan that will minimize costs and tax consequences (for example, based on a deferred sales charge schedule).

Assess client readiness to understand potential barriersReview the analysis from the previous step and determine which clients are eligible and/or likely to transition based on assets, mindset or other considerations. Consider if and how you will handle clients who may not be good candidates and consider gathering input from clients to understand how they perceive value and costs today.


On business readiness“If you don’t have all the designations, be prepared to take the time and focus on getting all the qualifications and think about all the models and the processes, so by the time you are licensed you’re ready to go.”

“Anybody who is looking at moving to fee-based should definitely be looking at going discretionary as well. In terms of a value management business, it’s an absolute must these days.”

“Scalability is key. I’m a big believer in discretionary management. When I talk about fee-based, most of those assets are in the discretionary model. It’s really the discretionary model that makes it scalable. It’s not necessarily just the fee basis of it. It’s the actual discretionary model and the fact that when you’re buying or selling a stock, you’re doing it across your entire model, your entire book of discretionary clients. You’re not having to make a phone call to every single one of them.”

The shift in practice modelsAn overwhelming 98% of advisors in Canada said they see a shift toward fee-based practices.1

1 Source: Ipsos survey of more than 900 advisors around the world, including 164 in Canada, on behalf of The Vanguard Group, Inc., and Vanguard Investments Canada Inc. Online quantitative surveys were conducted from July 16 to September 1, 2015.

98%


On assessing costs“The first step is understanding the existing costs for each and every client. Look at every single client portfolio, list all of the mutual funds held and their management expense ratios (MERs) and calculate the actual dollar cost for the client. It’s only when you realize actual costs that you can start thinking, ’How do I (A) lower the cost to the client? (B) ensure that I provided value for the client relative to those costs?’ If somebody’s trying to transition a book of business, it may take three or four years. This is on a per-client basis. You have to figure out what’s the current cost to the client? What can we transition easily from deferred commissions to front-load commissions?”

“I would call every mutual fund company and figure out what exit fees are. Now we can understand what’s the cost to hold on to a mutual fund? What’s the MER cost? What’s the DSC cost? Now you can actually do a mathematical equation that says, ’If we sell X, we’re going to save Y.’ ”

On client readiness“I don’t think you could ever get to 100% just because there is going to be some business based on guaranteed investment certificates (GICs), there is going to be some business where it‘s a small account or money that they manage on their own and they just don’t want to be in a fee-based account.”

“I knew it wouldn’t be for all clients, so I looked for specific clients that would fit, that would be receptive to the proposal. The criteria I used to make that determination were a combination of assets under management and risk tolerance of the clients and just knowing clients that prefer to rely on me rather than be the decision makers.”

Answer the questions on the accompanying worksheet to help you identify potential gaps in your current practice that you want to address as part of this transition process. Are there designations or skills you or your team need to acquire? How about clients you may not want to transition to fee-based?

Take action

Impact on revenue/profitabilityNearly three-quarters of advisors who manage $50 million-$100 million in assets (72%) view the impact of a fee-based model on their revenue/profitability as positive.2

2 Source: Ipsos survey conducted on behalf of Vanguard from July 16 to September 1, 2015.

72%

For financial advisor use only. Not for public distribution. 19For financial advisor use only. Not for public distribution.

For financial advisor use only. Not for public distribution.20 4Step 4: Create a timeline Fashion an estimated transition timeline,

incorporating your own goals and reflecting

any limitations identified during the analysis of

existing client portfolios.

Workshop 1


Develop your overall timelineCreate a timeline that (at least roughly) maps out the time you will spend on each of the following.

Preparation. The time to analyze clients and their portfolios, structure model portfolios, define your service offer and assess the impact on your business. (Steps 1-10)

Communication. The time invested in communicating plans to clients (Step 11)

Execution. The time invested in “repapering” clients (Step 12)

Note that time frames ranged from 6 months to 3 years depending on: whether the advisor was communicating the transition as part of the regular service cycle or as a separate project; the composition of client portfolios; and extent to which the advisor was managing the impact on cash flow.


“When I say ’underestimated’ the time, I think I underestimated the time to do it right. The transition occurred over two to three years, as we met with clients and as clients developed confidence in our ability to execute.”

“It was probably a little longer, it probably doubled, but we were trying to do it in three months over a summer. It ended up taking us six months, but that was a ton of work. It was nonstop. You do the math. We were very good at quantifying a number of meetings, a number of approaches by staff to set it up.”

don't underestimate

the time itwill take

Sketch out your timeline on the accompanying worksheet to help you and your team understand how long it may take to transition your business model.

Take action

For financial advisor use only. Not for public distribution.22 5Step 5: Involve the team: Involve your team in the vision for the business

and co-create the transition plan.

Workshop 2: Laying the foundation covers Steps 5–9


Communicate your plan Ensure that your team is on board with the plan, passionate about the vision and comfortable with the transition process. Arrive prepared at the initial meeting, having outlined your view of the vision for the business, the roles and responsibilities of the team (and if/how they could change), the process and the estimated timeline for transition.


”Training staff was a gradual process. We have our morning meetings every day. So, I think staff could see the shift in documentation and have all the paperwork ready and the follow-up with that by setting up appointments with the client.”

“You certainly have to train the assistant and say, ’Here’s the list of clients. Here’s the frequency. I want you to make a calendar. I want you to call the client, book the appointment, send the portfolio reports ahead of time and then maybe send a report if there is need for a report,’—although that tends to be more me than the assistant. Certainly some assistants are not used to that process. It’s a bit more work in terms of getting yourself organized to get it done.”

Use the checklist on the accompanying worksheet to track your progress in preparing and training your team for the transition.

Take action

Better for advisors’ practicesAbout 83% of advisors in Canada said a fee-based model was better for their practice, compared with commissioned-based.3


83%

For financial advisor use only. Not for public distribution.24 6Step 6: Structure investments Map out how you’ll manage client investments

going forward and the products and partners you’ll

use to execute that plan.

Workshop 2


Determine your approach to managing money (for example, model portfolios)Finalize your approach to managing client investments, specifically whether you’ll use model or bespoke portfolios.

Structure portfoliosInvest the time to structure your model portfolios and understand the associated costs.

Identify appropriate products/partnersDetermine which products and partners you’ll use to execute your plans. A majority of advisors who participated used low-cost products, such as exchange-traded funds (ETFs).


“It will probably be about a month or so of due diligence to put together those model portfolios and get something ready that you’d feel comfortable to take to a client.”

“We had model portfolios for every profile, so that everyone in the group was using approximately the same investment, the same fund or ETF. We have models, and we have a spreadsheet where we can just download a profile to see if it fits the model portfolio.”

“When we talk about model process, that’s what we take clients through. We create these buckets for clients in terms of their lifestyle, their legacy and their opportunities. Once we’ve gone through this planning process, we determine which of those three, if not all three of those buckets, apply and then how big the buckets need to be. Then, we come in with a different model on the investing side to determine how those buckets are invested.”

“We run segregated, individual client portfolios. We don't use a pooled-fund concept. So for each client we know their tax rates and the various accounts that have different tax consequences in the portfolio such as registered, non-registered. We model it to the exact client maximum tax-efficiency standard in the portfolio.”

a month or so of due diligence


“We spent a lot of time building our model portfolios. We came to an agreement on which investment solutions we wanted to use. Then it was about coming up with two or three solutions that we felt comfortable that we would use in every client situation depending on what their preferences or needs were.”

“Build your models. You need to really understand how you’re going to maintain them and how often you are going to review them. I have a cycle. I look at them over the summer. I’m using things like ETFs so I don’t have to get out of one and into another.”

“The business needs to be profitable in terms of a model that’s put in place for clients. Our view has always been that in order to avoid the conflicts, have a fee schedule that’s below the industry average and keep as many costs down as you can for clients. One strategy, obviously, is through the use of ETFs. Our turnover strategy is minimal because we just think that the more changes that are made in a portfolio, they’re just increasing the likelihood that mistakes are made in terms of extra costs involved.”

buildyour modelportfolios

Use the checklist on the accompanying worksheet as you map out how you’ll manage client assets.

Take action


For financial advisor use only. Not for public distribution.28 7Step 7: Structure your service model Map out a clearly defined client

experience based on the value of each

client and associate and assess the fees

you will charge to deliver on that plan.

Workshop 2


Segment clients based on valueIdentify the drivers of value in your business and segment clients based on their level of importance to your business.

Define service experience by segmentDefine the service level you will provide to clients in each segment, including products, services, contact and other communications.

Assess capacity to deliver on your service experienceAssess the time required to service clients in each segment based on the plan you’ve outlined and assess your ability to deliver on that plan with existing resources.


On service“With the different amounts of assets and different amounts of fees that people are paying you, you really have to have a service matrix that matches what you’re offering for different fee levels.”

“Capacity’s huge. I think 100 households is a good number. If you’re doing the full-on wealth management, wealth leadership approach, that’s a lot. The other thing that helps is if it’s discretionary.”

“It’s about process. It’s about having systems in place and being systematic in your approach—being rigorous and being disciplined. If you approach it that way, then you’ll get the leverage you want out of it. If you don’t, you’ll just be the same advisor charging a fee as opposed to getting a trailer fee.”

“We had calls, sometimes it was very often, other times it was 6 to 8 months or a year without calling them because there was nothing to do in their portfolio. But now there is a more disciplined service plan.”

”At every touchpoint, you have to articulate to clients the value that you're providing. You might say to a client, ‘Just so you know, we realized some losses here or we trimmed back on this.’ If it was in an up-market, you'd say, ‘We trimmed back on your U.S. position, etc.’ Clients don't realize the work that we go into potentially to customize what's going on, when, for example, they have eight accounts between them and their wife and one's in a lower tax bracket and one's in a higher bracket.”

“Typically from June through August we’re quiet; we’re more responsive to clients. I might be looking at insurance and things like that. Then in September, we start all over again and just do semi-annual reviews and update clients on all aspects of what we’ve talked about in the past two years. I would say for our clients who have $500,000 or more, we’re probably having three meetings face-to-face per year and maybe a few phone calls plus lots of email communication in between that. For clients that have $250,000–$500,000, we might have two face-to-face meetings and a few phone calls. Clients under the $250,000, we might have one face-to-face and phone calls or emails.”


Finalize feesMap out fees, differentiated based on asset levels and reflective of the client experience you will deliver. Determine if there are any circumstances in which you'll discount and to what extent.

Assess profitabilityAssess the profitability of client relationships based on the cost of delivering on the client experience you’ve identified and the associated fees you'll charge.


On fees“I always say the ratio is two-and-one-half to one. If it’s going to be a cost of $6,000 per year for a client, I want MERs to be about $1,500–$2,000.”

“We’ve wrestled with the idea and said, ’Why wouldn’t we just charge a flat fee altogether based on the complexity of their situation and what we think it will take to manage their assets and do the financial planning advice.’ ”

“We have a laddered system, so, basically it’s graduated as the asset size grows we’re able to decrease the fees, that’s pretty standard across the industry. But, within that though, we’ve found within those parameters of each ladder, ’What is the fee that we would like to charge for x amount in assets?’ That’s the way we managed that piece and by coming up with that number we thought that clients at this level of assets are probably requiring these services. Of course, that’s a little bit vague; there was always wiggle room there.”

“Stick firm to your pricing and don’t discount—the value of advice isn’t malleable.”

“I think it’s ridiculous that people negotiate individual prices per client. I think some people change their pricing because they’re saying that they’re willing to give up some points to get a guaranteed sale versus sticking to it. If I start out with a discount, I’m never going to get it back. You can’t go back three years later and raise it.”

“You have to find that balance in the middle where the fee is very fair, but at the same time, you're not discounting your business. My value proposition is service so, of course, I'm going to charge for that service. But, at the same time, you have to be fair and equitable for both myself and the client. That's imperative.”

as the asset size grows we’re able

to decrease the fees

Use the checklist on the accompanying worksheet as you evaluate clients, the services you’ll provide as well as the fees you’ll charge for each.

Take action


For financial advisor use only. Not for public distribution.32 8Step 8: Define transition plan Create a detailed transition plan outlining which

clients you will transition first and when.

Workshop 2


Identify exactly how you will transition clientsReview the analysis you've completed to date to determine how you'll transition clients, including:

• Which clients you’ll approach first based on cost implications, importance of the client to your business and their level of sophistication.

• When you will approach clients (for example, as part of ongoing client reviews).

• How (and over what period of time) you'll set the stage with clients.


On handling the timing when there are tax implications“One of the challenges is if clients have large capital gains. You don’t want to trigger a $300,000 capital gain just because you want to move to a fee-based practice. So you have to think about that and make sure that what you want to do is a win/win situation not just for yourself, but for the client and yourself.”

“We can tear the bandage off or we can wait. If we wait, break-evens of DSC charges when you’re saving the client 1.25% are pretty fast. Our break-evens were anywhere between eight to 14 months.”

“Depending on the structure of the client’s existing portfolio, there can be tax complications. There can be costs associated with making those changes. So, it’s not necessarily as simple as just one fell swoop you blow out everything they currently own and you transition into a new model portfolio sometime. Sometimes we’ve had to do those transitions over a period of two or three years, just trying to reduce the tax bite that would be created if we suddenly liquidated the big portfolio of mutual funds or individual stocks.”

“The biggest thing would probably be taxes. I would say it was our single biggest hurdle. Most people were realizing a cost savings, so it’s kind of a no-brainer. But, the issue would be more that if you’ve had gains over the last few years and taxable accounts, non-restricted accounts, people are a little bit leery of triggering a big capital gain build to make the transition. So, usually we would go ahead, but it would be a work in progress where we might sell a quarter or part of the portfolio or transition a third of it immediately. Then, do another third the following year and another third the following year until it was completely done. It's a work in progress when you have large, non-registered accounts with a capital-gain issue.”

“There was a crossover point on my graph where the break-even was and if it was two years or two-and-a-half years or less, I would recommend we just pull the trigger. I had to really decide what cost to make the switch was acceptable and the timelines for the break-even or payback.”


On which clients to approach first“Easiest clients first, then largest and then, of course, whomever was coming through concurrently.”

“As with everything in life, you start with the easy part. The easy clients were done first to build our confidence.”

“I would definitely start in that mid-tier. Like anything, you want to be as professional and as knowledgeable as possible. There are always small growing pains that go with this and you never want to test things out with your largest clients unless they’re just good friends and you can say, ’Hey, can you be my guinea pig?’ If you’re comfortable with a top-tier client that way, that’s fine. But, generally, I would think that starting at the mid-tier and working your way up makes more sense.”

On when you will hold client meetings“As clients were coming in for reviews, we would sit down and have that discussion with them. I would do all my homework prior to the meeting. We would then do the cost-benefit analysis and run through the changes to their portfolios that we wanted to make.”

“It depends on the client but often, going into that meeting, my assistant would prepare the paperwork in terms of client updates and risk-tolerance profile. So, if they were receptive to that discussion right away, then we’d have the paperwork ready and we could go through that process. If it’s something that they want to think about I wouldn’t leave the paperwork with them. I've learned that if you give them the paperwork, typically it never comes back, so, that’s one thing. Then, it’s about setting up that next meeting at their convenience.”

On how you set the stage to let clients know about the change“For the first 18 months I was telling my clients repeatedly what I was doing and why I was doing it. Because up until then, I was using DSC mutual funds, I was doing 10% pre-redemptions to minimize the cost and the impact on my clients before I started actually doing the transition for real.”

“You plant the seed, then a couple of weeks later you’d water it. Then, you water it some more. Then it needs some sunshine. Then it needs some time and then you water it. It can often take six months, if not longer. So, there is that time factor of transition. It’s not something that’s instant. With time like that you can get frustrated, you can get bored of constantly talking about the same thing to the same person.

Use the checklist on the accompanying worksheet as you conduct your analysis of the tax and cost implications of transitioning each client to fee-based. Which will you transition first? Which clients will you approach before starting to switch your practice?

Take action

For financial advisor use only. Not for public distribution. 35For financial advisor use only. Not for public distribution. 35

For financial advisor use only. Not for public distribution.36 9Step 9: Assess economic impact Understand the impact of a transition on

your business with respect to overall revenue

and cash flow.

Workshop 2


Assess impact on your overall revenueAssess the impact of a transition to a fee-based business on overall revenue and profitability based on the percentage of clients who will be transitioned, the timing of those transitions and the service model you created.

Assess cash-flow implicationsAssess the additional impact, if any, of shifting to a different payment schedule and make any plans to help you through that transition.


“I had to make peace with temporary poverty. I would say that it lasted two to five years.”

“For about 3 years. At least 2 big years, I had a cut in my income, a major, major cut in my income.”

“Cash flow was the biggest challenge. It was about getting funding, a line of credit or reserve built up. We were able to do both to transition over. Even small things like we didn’t get paid immediately. When we converted to the discretionary managed platform, at first we were only paid on a monthly basis.”

”You’ve really got to look at the turn of your book based on the transactional model versus the fee-based model. We were in the unfortunate position that we were turning at quite a higher rate than the fees we would be and now are charging on a fee base. What that means is that we needed to actually decrease our revenue or return on assets in order to move to fee-based. For a lot of people that’s the opposite, but we always had a fairly active book of transactional clients. It was a bit of a pill to swallow for us to actually embark on a strategy that we knew shorter term was going to limit our revenue growth at best, and actually decrease our revenue at worst in order to increase the scalability of the business and the service platform for future growth.”

Use the checklist on the accompanying worksheet after you’ve completed your financial projections and assessments of the cash-flow implications of switching your business model.

Take action

Assessing the business impactAdvisors worry about the impact of a fee-based transition on their profitability/revenue and their compensation. Only a third of advisors managing assets of less than $50 million said a shift to fee-based is a positive influence on their business. However, nearly three-quarters of advisors who manage more than $50 million said the impact is positive.4


<$50M >$50M

For financial advisor use only. Not for public distribution.3810Step 10: Refine messaging Get clear on how you will position and

communicate the transition to your clients.

Workshop 3: Implementing change covers Steps 10–12


Map out speaking pointsArticulate your vision for the client and the reasons for making this change.

Think through potential objections and craft your responseAmong the objections identified are the following:

• “I’m paying less than that now.”

• “Why would I pay the same in a down market?”

• “Couldn’t I do that myself?”

• “Why would I pay you to hold a stock?”

Create leave-behind/collateralDetermine what you'll provide to clients before, during or after the meeting when you share your plans. That information may include: a cost analysis of the current portfolio, an overview of your offer and client experience or a summary of the benefits of charging fees.


On messaging“Your current costs are bundled, kind of like your cable TV bill and your phone. We’re going to strip that apart. So we can use any products that we want, the products that are best for you. They’ll just happen to be low-cost products. But those costs will always be embedded in the product. They’re a tenth of a percent. On top of that we’re going to have our management costs charged to you as a client, and those are tax deductible for your account.”

“I would say that transactional is really focused on investment management. Fee-based is focused on portfolio management. I just feel that portfolio management is better aligned in a fee-based structure where I can rebalance on increments, where it’s a percentage in the portfolio and then that percentage goes up and other percentages will go down.”

“We say that, in our mind, there is a conflict of interest on commissions because you have to have a transaction to be paid. It puts pressure to do transactions.”

“They have to understand. Show them how the MER works in a mutual fund. I show them the hypothetical 10% return—but you only see 7% because it’s taken off the top, and then this charge, all this stuff is lumped together. I show our cost, then say this is what we’re going to switch to because people never saw ’money’ come out of their account before.”

“You sure can say, ’Mr. and Mrs. Client, there’s going to be a lot of conversation about fees and costs in the coming months and years. I think it makes total sense for you to be aware of what those fees and costs are and how we can work together to lower them.’ ”

Transitioning can benefit clients Advisors see a benefit to clients in switching to a fee-based model: 76% said fee-based was better for their clients.5


4


“For us, in our conversation with clients, we focused on cost control. We focused on risk control. Those were the big things. The other thing that we really talked about, interestingly enough, was, because of the way we run money, we focused on the ability to spend time on the financial plan, which really made a big difference.”

“First, by asking, ’Do you know how much it’s costing you now?’ ’It’s costing me $1,000 in commission.’ ’There’s one-third of the portfolio that’s in mutual funds, that’s costing you 2.5% per year.’ There was a lot of cost that the clients did not see. One of the ways to do it is to show full cost, then it becomes a lot more comparable.”

“My challenge earlier on was that I would put in my presentation too much emphasis on the fees, the cost and not enough on the value I could add.”

“Once you have the conversation, you show what your compensation has been. Then you go on to the next step—what my compensation is going to be when I go forward with this. Now, there comes that whole value-added proposition. ’Okay, here’s what I’m charging you, here’s what the cost of my services are.’ Then you’re going to have the conversation, ’Well, what are your services? Under your fee-based compensation, how are the various services you provide allocated among the cost structure?’

“You need to be able to answer these questions: What else are you doing? What else are you offering those clients? How are you becoming a consultant worthy of an ongoing fee? You always want to be able to defend yourself, so part of it is re-prospecting. Some clients you might have had for a number of years. You need to go back at them as though they’re a brand-new client in some cases and explain to them why you’ve changed or what’s the benefit to them. It only matters what they care about. What’s the benefit to the client?”

On leave-behind material“I have a corporate presentation package that we put together that we give to prospective clients. It walks through a number of things from what makes us different in terms of our licensing and capabilities as a discretionary portfolio manager. It’s what we refer to as our fiduciary duty model. What that means to a client is how that serves them better than a traditional suitability type of advisor or broker.”

“I think being able to articulate it in a tight, three- to four-page pitch book, something that talks about maybe what your business used to look like, what it is you’re offering them and what it is you’re committed to doing, to warrant and to earn your fee.”

Use the checklist on the accompanying worksheet when you’ve developed your script to explain to clients the benefits of this transition. Have you thought through the objections clients may raise?

Take action

For financial advisor use only. Not for public distribution. 4141For financial advisor use only. Not for public distribution. 41

For financial advisor use only. Not for public distribution.4211Step 11: Meet with clients Hold client meetings to share your plans,

the benefits and the next steps.

Workshop 3

For financial advisor use only. Not for public distribution.11 43

Hold conversationsHold your conversations with clients to introduce the approach, plan, value and process based on the timeline you created.

Create a follow-up processMap out a follow-up process where additional meetings are required and track your progress.


“I would have five or six meetings per day and we would explain to each client how it would work and what the benefits were for them and we explained why we would do the transition over three years for most of them.”

“In our spreadsheets we showed a weekly tally of meetings held and conversions done. It included the total target. If we were supposed to be at 100 at that point and we were only at 90, we’re ten behind so we’ve got to add that on to the next two or three weeks. We spread it over a period that so the meeting volume per week has to get bumped up by two per week if we’re going to do it. That’s where we could tell pretty early on that we were not going to achieve the three-month target.”

explain toclients how itwould work

Use the checklist on the accompanying worksheet when you’ve developed your script to explain to clients the benefits of this transition. Have you thought through the objections clients may raise?

Take action

For financial advisor use only. Not for public distribution.4412Step 12: Execute the transition Execute the necessary paperwork to transition

those clients who are ready to move.

Workshop 3


Repaper client accountsMap out a plan, process and timeline to repaper accounts, including documentation for the client that outlines what they can expect as a result of the new structure.


“I provided them with the service plans, which would list the services they get, list the fees, then provide a breakdown of how often we’re going to get together. So clients were getting a lot more and it is a lot more transparent. Clients received the investment policy statement (IPS), the service plan and the financial plan.”

“The first thing we provide is the IPS for every client that we have, a service plan that we print out for them. The fees are indicated there, what they get for that is there—the number of meetings they will have during the year, the points of contact for the team, the financial or retirement planning that’s available to them, the rebalancing that we do and information on the ongoing management of the portfolio. It’s all written out in black and white—what they get for the fee that we charge. That also helps in structuring the relationship. If they do know that our team is going to call them to fix a meeting, say a biannual meeting, that structure is a comfort to the client.”

“Make sure you’ve got an administrative process in place with regards to the paperwork that needs to be done. That would be for sure because that can be cumbersome and slow down the process. You don’t need that. Be prepared with the admin process. Establish a process to get the paperwork through from client to new accounts.”

provide a service plan

for each client

Use the checklist on the accompanying worksheet after you've executed the paperwork needed to transition your clients. Have you identified all documents that you need to provide? Have you created templates of any new documents that you’ll provide?

Take action

Time for a change? More advisors have identified their path and are considering shifting to a fee-based compensation structure: 58% foresee their practice changing to fee-based over the next three to five years.6


58%

For financial advisor use only. Not for public distribution.4646 For financial advisor use only. Not for public distribution.46


About Vanguard

Vanguard believes in the value of the advice that advisors provide and supports the fee-based model for the transparency that it affords investors. The Vanguard Advisor's Alpha™ concept is based on three simple elements: top-down portfolio construction, behavioural coaching and wealth management. By shifting the primary focus away from an expectation of outperforming the market, advisors can concentrate on things they can control: tax efficiency, diversification and the cost of investing.


WE’RE IN IT TOGETHER


Commissions, management fees, and expenses all may be associated with investments in a Vanguard ETF®. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard ETFs® are managed by Vanguard Investments Canada Inc., an indirect wholly owned subsidiary of The Vanguard Group, Inc.

Date of publication: November 2016

The views expressed in this material are based on the author’s assessment as of the first publication date (July 2016), are subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc. The author may not necessarily update or supplement their views and opinions whether as a result of new information, changing circumstances, future events or otherwise. Any “forward-looking” information contained in this presentation should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned in this material or anticipated in this material.

This material is for informational purposes only. The material in this presentation is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation.

Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice.

While this information has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively,

”The Vanguard Group”) as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.

This material does not constitute an offer or solicitation and may not be treated as an offer or solicitation in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

In this material, references to “Vanguard” are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

All investments, including those that seek to track indexes, are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While ETFs are designed to be as diversified as the original indexes they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment. Investments in bonds are subject to call risk, credit risk, income risk and interest rate risk. Please see the Vanguard ETFs’ prospectus for a description of the unique risks applicable to bond investing. Foreign investing involves additional risks, including currency fluctuations and political uncertainty. Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

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