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BLUECHIPPRACTICE

BLUECHIPPRACTICE MANAGEMENT | OperationsBuilding a financiallysustainable practiceThere is lots of talk about different fee models for financial advisors.If we look at huge companies like Microsoft and Apple, we cansee that they have moved from once-off to ongoing revenue(we used to buy Office on a CD but now subscribe to Office365). They have done this because subscription models createongoing or passive income. This means that these companiesnow get paid over and over for the same sale, resulting in higherearnings over the medium to long term.Ongoing income also improves client loyalty, financial stability,growth potential and a higher practice valuation. Like Apple andMicrosoft, financial planners with a high proportion of passiveincome tend to earn more over the long term, because passiveincome accumulates over time, unlike upfront commissions thatare the result of a single year’s effort.Empirically, when we looked at all the Fairbairn Consult advisorswho earned over R1-million in 2024, we found that 78% of theirincome was ongoing, with only 22% once-off. In other words, theadvisors who make the most money do so because they have a highproportion of ongoing income that builds up over time.By considering different commission models, you can makethe strategic shift from once-off to ongoing revenue for every lineof business.You can see that the upfront commission on life products is theworst because it creates the risk of clawbacks, does not buildongoing income (other than premium updates) and it doesnot contribute to your practice valuation. As a result, it is mostimportant to shift from upfront to as-and-when commission on lifeproducts. To do this, you need to understand all the options fromthe different product providers, so that you can recommend themost appropriate solution to your clients, and, at the same time,ensure your own financial sustainability.The conventional approach to transition from upfrontcommission to as-and-when is to take as-and-when commissionon a portion of policies and to switch entirely to as-and-when afterreaching a specific monthly income target. However, you can alsoconsider a mix of as-and-when and upfront commissions, with ahigher proportion of as-and-when for larger policies so that youmitigate the risk of clawbacks.You can even game the system by taking as-and-whencommission on policies that are either likely to lapse early or stayon books for a long time. Let me explain: while each product hasslightly different as-and-when commission structures, they all resultin higher net income than upfront commission for policies thatlapse early because you do not get hit by a clawback. They also paymore over the long term because there is a built-in rate of returnof around 15%. And don’t forget that as-and-when commissionincreases every year when the premiums increase.By switching from once-off to ongoing revenue, you can deriskyour business, earn a predictable monthly income that keepsgrowing and increase your practice valuation. While many advisorsknow this, it takes discipline and conviction to make one of themost important changes in your business.One day or day one – you choose. Source of incomeNature ofincomeDoes it create riskfor you?Does it buildpassiveincome?Does itenhance youvaluation?Nature ofincomeDoes it createrisk for you?Does it buildpassiveincome?Does itenhance youvaluation?Advisors earning ONCE-OFF incomeAdvisors earning ONGOING incomeLife RiskUpfrontCommissionHigh risk - can beclawed backNoNoAs & WhencommissionLife SavingsUpfront + As &WhencommissionHigh risk – upfrontportion can beclawed backPartlyPartlyAs & WhencommissionInvestments, Once-offfeesPension FundsUpfront Adviceor Service feesAnnualizedCommissionLow risk - cannotbe clawed backHigh risk - can beclawed backNoNoOngoingAdvice orService feesOngoing /monthlycommissionLow risk -cannot beclawed backYesYesShort-term, Life Risk, LifeSavings, Pension FundsInvestments, Medicalschemes, Non-lifesavings, Subscription feesAs & WhenCommissionOngoingAdvice orService feesLow risk - cannotbe clawed backYesYesAs & WhenCommissionOngoingAdvice orService feesGuy Holwill, ChiefExecutive and Founder,Fairbairn Consult52 www.bluechipdigital.co.za

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