Model Portfolio & SMA Strategists Showcase - Flipbook - Page 47
SMAs & MODEL PORTFOLIOS
THE REVENUE MODEL
CONVERSION
A practice built around individual
fund selection is often still earning
at least part of its revenue through
commissions: front-end loads on mutual
fund purchases, ongoing 12b-1 trailing
fees embedded in fund expense ratios,
or transaction-based compensation
tied to trades rather than assets under
management. Managed accounts,
almost without exception, run on a feebased model instead. A percentage of
assets under management, sometimes
layered with a flat retainer, replaces
commission income entirely.
This conversion deserves more planning
than it typically gets, because it doesn’t
happen instantaneously even when the
decision is made all at once. There’s a
real transition window, sometimes called
a revenue air pocket, where legacy
commission income winds down as
clients migrate out of commissioned
products, while new AUM-based fee
income ramps up gradually as those
same clients’ assets convert into feebased managed accounts.
A practice that doesn’t model this gap
explicitly can find itself with a genuine
cash-flow problem in year one or
two of an otherwise sound long-term
transition, not because the strategy was
wrong, but because nobody calculated
how long the overlap would actually
last.
A related decision, worth making
deliberately rather than by default, is
what to do with existing commissionbased accounts that clients are
comfortable in and that aren’t causing
any particular problem. Grandfathering
these accounts, leaving them on their
current structure rather than forcing a
conversion, is a legitimate choice for
a client with no compelling reason to
move, and forcing every legacy account
into the new model on an arbitrary
timeline can create exactly the kind
of unnecessary tax events and client
friction the portfolio-transitions chapter
warns against (p. 36).
The revenue-model conversion
applies most cleanly to new clients
and to existing clients for whom the
segmentation framework discussed
earlier already argues for a change (p.
44). It doesn’t have to mean an all-ornothing conversion of every account on
the books simultaneously.
COMPLIANCE AND RE-PAPERING
AT SCALE
Moving a client from a commissionbased brokerage relationship into a
fee-based advisory one is a change in
the legal nature of the relationship, not
just the investment approach, and it
requires its own paperwork independent
of anything covered elsewhere in this
guide. New advisory agreements need
to be executed. Account registrations
often need to change from brokerage to
advisory status. Updated disclosures,
including, for a dual-registrant or
hybrid practice, the specific Regulation
Best Interest and fiduciary-standard
disclosures discussed earlier (p.22),
need to reach every client being
converted, not just the ones the advisor
happens to be meeting with that
quarter.
This is a genuine operations project,
and treating it as an afterthought to the
client conversations already planned
(p. 42) is a common and avoidable
mistake. A practice converting a
substantial share of its book should
build a re-papering calendar alongside
the client-sequencing plan discussed
earlier, batching the actual paperwork
(agreement execution, registration
changes, disclosure delivery) in a way
that a compliance function, whether
in-house or outsourced, can actually
process without becoming a bottleneck.
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WHEN TO REACH
FOR THIS
Redeploying an
internal analyst role
Old workflow: screening funds, building
a preferred list, calculating manual
rebalances. New workflow: running the
four-leg due diligence on providers,
monitoring existing relationships
against the performance-skepticism
standard discussed earlier, auditing
the practice’s fee stack across every
provider relationship. Same underlying
skills, different object of analysis.
A redeployment conversation, not
necessarily a hiring or firing decision.
It’s worth documenting, client by
client, the specific rationale for why
the conversion is in that client’s best
interest, both because it’s good
practice and because it creates a
contemporaneous record that a
fiduciary standard implicitly expects
to exist, rather than something
reconstructed after the fact if it’s ever
questioned.
STAFFING AND WORKFLOW
REDEPLOYMENT
A practice that has spent years building
internal fund-selection capability, an
analyst running Morningstar screens,
a paraplanner maintaining a preferred
fund list, someone manually calculating
rebalancing trades, has real, capable
people whose day-to-day work is
about to change substantially. This is
worth planning deliberately rather than
assuming it resolves itself, because the
honest alternative to planning it is either
quietly reducing staff or leaving skilled
people without a clear sense of what
their job actually is anymore.
The more constructive path, and the
one this guide would argue for given
everything covered so far, is redeploying
