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Sourajit Aiyer - Financial Express Bangladesh - Commission Model to Fee Model in Financial Distribution, Dec 2013


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Sourajit Aiyer - Financial Express Bangladesh - Commission Model to Fee Model in Financial Distribution, Dec 2013

  1. 1. Fee replacing commission in product marketing | VIEWS & REVIEWS | Financial Ex... Page 1 of 4 New Search VOL 21 NO 31 REGD NO DA 1589 | Dhaka, Wednesday, December 11 2013 1JANATAMF 0.00 Breaking News 6.00 0.00% » 1STPRIMFMF 0.20 26.00 0.78% 3RDICB 0.00 190.10 0.00% 4THICB 0.00 Old Search 190.00 0.00% Google Search 6THICB -0.50 52.10 -0.95% BNP standing committee member RA Gani arrested from Gulshan office FE INSIDE MORE FROM THIS SECTION ■ FIRST PAGE VIEWS & REVIEWS LAST PAGE POLITICS & POLICIES EDITORIAL SPORTS Posted : 11 Dec, 2013 00:00:00 A A- LATEST NEWS Fee replacing commission in product marketing More Online News VIEWS & REVIEWS TRADE & MARKET ■ Distribution of based commission model. METRO/NEWS commission-led COUNTRY intermediary on the In the model, the ■ AL firm to hold general election on Jan 5 ■ Burnt body of AL leader found ■ BNP demands cancellation of polls schedule ■ US stocks decline ■ GM's Holden to stop car making in Australia ■ Salimullah Medical College closed (adviser) receives a commission from WORLD European stocks end lower financial products in most countries is primarily VIEWS & OPINION Listening to the women of the mountains A+ Sourajit Aiyer STOCK & CORPORATE Fee replacing commission in product marketing ■ HOME the manufacturer (AMC) for GLOBAL SCENE the product he sells to his REGION client. Commission rates differ Detailed DSE Trading across products. Hence there is often a tendency to push FE EPAPER products which earn higher commissions for the distributor. This leads to instances of mis-selling sometimes, since a product earning higher commission may not always be the correct one for the client's specific goals. Since it doesn't always work for the client's best interests, it often leads to client dissatisfaction and low chances of stickiness. Hence, the fee-based advisory model has started gaining ground. This model is believed to work in the best interest of clients in terms of his long-term goals, as it remunerates the adviser for the advice he renders to grow clients' assets. This is expected to enhance the client's satisfaction with the adviser's services and chances of stickiness of assets, which should ideally also help the adviser's income. This article attempts to understand how advisers can make their transition to the fee-based model successfully. FE ARCHIVE Go Making the transition successful needs the following: * Communicate the value proposition of the new model to clients along with its benefit for them, including the strengths of adviser's own advisory service. Communicate to the clients that the advisers will be working in their best interest in terms of genuinely helping them to achieve their long-term objectives by advising on products/plans best suited to grow their assets. Emphasise that it reduces chances of selling products just because it earns higher commission. If the client sees true value in the adviser, he would continue despite the transition. If the adviser has faith in the quality of his advice, he can be more assertive. * Meet key clients personally to explain to them the plan/benefits for transition, at least for the larger client accounts. Email a letter or concise presentations outlining the plan and its benefits, so that they can use it while it thinking over. * Recognise client feedback/common queries/concerns from the initial interactions to tweak subsequent interactions accordingly and increase effectiveness. Practise delivery initially with own-company people to assess if the delivery sounds convincing. Benchmark and map the process done by the successful/senior advisers to train the remaining adviser force. * A dilemma is with whom to start. Surveys in the European Union countries show it's actually the older, experienced, wealthier, financially-educated clients who consult advisers more. Hence, advisers looking to make a transition might start with that segment first from among their client base. Try one's oldest clients c first as there is an established trust factor with them. Advisers can make the delivery sound like they are seeking client's advice/opinion on this transition idea, 12/25/2013
  2. 2. Fee replacing commission in product marketing | VIEWS & REVIEWS | Financial Ex... Page 2 of 4 and not merely informing them. Or else, they might try on smaller clients first in order to polish the delivery and gain initial feedback. * Define a compelling and holistic service promise based on adviser's own capabilities and what clients are typically seeking, and try to deliver on that service promise completely without any service gaps. Service promise needs to be based on client end-objectives, rather than simply market out-performance. Assessing market performance of chosen assets is beyond one's control; hence a proposition based solely on out-performance may not show results each and every year. Instead, advisers need to broaden the service promise using activities which can be better controlled, like asset allocation, rebalancing, low-cost investing, planning for lifetime needs, reviewing the progress, tax efficiency and behavioural coaching so that the external noise does not influence him. Stress that the broader scope of services is not really addressed in the commission model. Also, out-performance is not always perceived positively since it might mean riskier or concentrated portfolios which can swing both ways. * Service promise needs to be complemented with quality and relevant advice. Stress to clients that the fee model ensures better quality of advice. Justification for the service is pinned on the claim that it creates long-term value for the client, and correct and relevant advice will take clients closer to their goals. This requires methodical understanding of the client's goals for that money, drawing a plan that seeks to achieve this with a service promise, and keeping that service promise. It also involves estimating client's future liquidity needs and conveying product risk factors beforehand. A test to check if clients really perceive the advice as good quality and relevant is the number of word-of-mouth referrals they can give for new clients. Periodically check client satisfaction via structured feedback. Do not mistake inertia as client satisfaction. * Lack of proactive communication is a major factor determining client satisfaction. Delivering on the service promise needs to look at after-sales services too, since absence of regular communication on status can often lead to client dropouts despite good advice. This includes communication on portfolio updates, reviews, forward action plans, including during phases of downperformance. This also includes update discussions to reassure clients during any macroeconomic/political/regulatory event which clients fear may have a bearing on their investments. It helps clients to be aware of where they stand vis-a-vis their long-term goals. Ensure all meetings and communications that were promised in the service promise are met. Use enhanced report formats which are more holistic in their comparison to client goals rather than just concentrating on the out-performance number. * Adviser should process-map the service promise to ascertain dependencies for achieving the outcome, develop KPIs based on those and remove any gaps. Start with the outcome and work backwards to ascertain dependencies. Each dependency is part of an activity that helps establish key performance areas for achieving the service promise. Process mapping of the activity chain can also help address any gaps if they exist. Conduct periodic status-checks during the relationship. * Delivering on the service promise without gaps typically means that the stated goals and client satisfaction are most likely achieved. Successful advisory relationships often generate sizable business through sticky relationships since clients perceive value in the service. Repeat business lowers the incremental cost of client servicing, which is good for profitability, given the comparatively higher cost of client acquisition. Hence, endeavour should be that no gap exists between what was promised to clients and what they actually experienced. Clients' willingness to stick and do repeat business depends on it. * Explore aligning the adviser's incentive structure with client satisfaction levels and repeat business volumes. Also, sticky relationships might be convinced to pay more for additional new services. * Transparency in costs is also a part of the service promise. Itemise all the activities involved in delivering that promise. Price each stage separately if possible to bring in transparency in fee. Nobody likes last-minute surprises when it comes to paying costs. Estimate reasonable break-even assets under management (AUM) and target only those clients which can bring in profitability. c * Advisers cannot expect to retain every client and may also need to resist from adding every prospect due to viability reasons. Adviser's success depends on 12/25/2013
  3. 3. Fee replacing commission in product marketing | VIEWS & REVIEWS | Financial Ex... Page 3 of 4 focusing on clients who can help build long-term profits and the larger need is to build the correct client base which is ultimately capable of giving profitability to the adviser's business. Advisers can estimate the minimum client AUM level required at which he can profitably render his service. Using his costs, assume the break-even revenue level. Using the percent of AUM method and a typical fee of 1 -1.5 per cent, divide the break-even revenue by the fee to get the break-even AUM needed to ensure that the cost of servicing is at least met. Depending on the number of clients in the system, it should give a reasonable level of break-even AUM. * If this break-even AUM is higher than realistic market standards, the adviser needs to re-look at his costs to be able to do the business at a lower minimum AUM. Advisers might also identify a range of AUM levels for different segments of target clients based on different costs of servicing. * For clients below this break-even AUM, retain them if possible by lowering costs using standard template advice-matrix, using call centres or using junior advisers. Or at least help them transition to another adviser, because this is a business where relationships are all that matters. * Prepare comparison sheet of pay-outs of key clients as per the commission model, and what these would have been under the fee model. While transactions would have different in either model naturally, nevertheless, it might give a rough idea of which would have been beneficial. * Prepare an index of client satisfaction based on variables like extent of flows from repeat business, client churn rate, new client referrals from existing clients, feedback scores received, etc. Use this to estimate the existing client satisfaction and if an improvement is required at all * Prepare fee matrix as per different asset sizes, along with fee per individual service, and assess if the final pay-out for the client is within acceptable limits. Also explore the option to maintain part of adviser incentive structure based on actual asset growth achieved. Advisers really need to assess their client's profile, investing behaviour, longevity and satisfaction, as well as their own capabilities and strengths to ascertain the roadmap for the transition. The transition will be a slow and gradual process. Advisers will have to convince them of its benefits and stress that it makes advisers work in their best interests. Clients place their trust based on the adviser's success. Hence, it might be better to under-promise and over-achieve in terms of the service promise, rather than over-promise and then fall short. At the end, profitable growth makes a valuable and sustainable business. Hence, sustaining profitability should be the objective that advisers need to think of ultimately. The author works India. with a leading capital market company in The views expressed are personal and may not represent any entity. 0 0 0 0 0 0 2 Like Apartments In Mulund 2,3 BHK Homes Starts @ 1.46 Cr with World Class Amenities. Book Now! Comments c 12/25/2013
  4. 4. Fee replacing commission in product marketing | VIEWS & REVIEWS | Financial Ex... Page 4 of 4 14 Benefits Most Seniors Didn't Know They Had Michael Jordan Dunks at Age 50 30 Completely Absurd Russian Dating Site Photos Nigerian man survives 3 days at bottom of Atlantic BNP slams EC for involving army in Jan 5 … Khaleda's speech full of lies : AL | FIRST PAGE | … IBA, 14 DU depts to include CSR | STOCK & … NU students face session jam | LETTER TO … ★ 0 comments Best Home About Us Contact Us Editor's Panel Web Mail Feedback Print Version Ad Price Editor : Moazzem Hossain, Published by the Editor for International Publications Limited from Tropicana Tower (4th floor), 45, Topkhana Road, GPO Box : 2526 Dhaka- 1000 and printed by him from City Publishing House Ltd., 1 RK Mission Road, Dhaka-1000. Copyright © 2013 International Publications Limited. All rights reserved Telephone : PABX : 9553550 (Hunting), 9513814, 7172017 and 7172012 Fax : 880-2-9567049. E-mail:,, and Copyright Sheershanews © 2013 Developed By : c The Financial Express Like 8,207 12/25/2013