Five steps to fee-based broking

The recession is prompting companies from every sector to take a hard look at their operating costs and structures – and brokers are no exception. They are also in the firing line as clients search for ways to save money and get greater value from their insurance spend.

Once you throw into the mix the future of commission-based remuneration and the drive in other financial intermediary sectors for a fee-based approach, it begins to feel like a perfect storm.

One thing is clear: brokers need to find ways to reduce costs, improve efficiency and improve profitability.

Some see a switch to fees as a step too far. But others believe the increased transparency will help secure existing business and attract new clients. They also believe a fee-based service is more efficient.

Initially, brokers may feel the pinch simply because they have trouble justifying their fees to clients, or because they are losing their commission flow.

But their businesses can become more profitable and sustainable.

So, what aspects need to be considered and what key steps need to be taken to establish a fee-based broking business?

• DEFINE YOUR SERVICES

Clients will be paying for the specific services they receive, so the first step must be to set out clearly what these services are and how much they cost. You may not have focused on this in the past as commission-based arrangements can be more loosely defined. A fee-based relationship, however, demands a different way of operating and it’s important that expectations are agreed on both sides at the start.

• DETERMINE THE FEE STRUCTURES AND COSTS

Determining the right fee and specification for each service will enable a broker to set an appropriate cost. But the broker needs to understand staff costs and other business expenses before setting service costs and chargeable rates. That’s the only way the company will make sure costs are covered and a profit is made.

• CLOCK YOUR CLIENTS

Central to the success of any fee-based system is the recording and monitoring of the time staff spend both on client work and on non-chargeable activities, such as business development. A time management system can help as it allows the broker to ensure the time that staff record against a particular service is in line with the agreed charge.

Through careful monitoring – ideally once a week – brokers can ensure that all billable client work is recorded and charged.

Moreover, if employees are charging for different amounts of time for the same service, the firm can take whatever action is needed before a major problem arises.

For example, if staff regularly “over-service” a particular client, it may be necessary to review the way they are working with that client. Equally, clients that are more labour intensive can be encouraged to explore better ways of working or the broker can increase the fee to compensate for the extra time.

Rather than being seen as Big Brother, time recording motivates staff to record their time accurately. It also focuses their minds on working productively and efficiently.

Effective time monitoring also allows brokers to plan for the future. They can take an overall view of the work they are undertaking for each client and identify the amount of profit they are making. They can also benchmark the performance of a particular office, team or department.

• SET TARGET INCOME LEVELS

Once the service and charging structures are defined, the firm can start setting target income fee levels for the staff. Again, evidence from a range of sectors shows that setting targets can focus staff on their work and motivate them to achieve a specified level of productivity. It makes a quantifiable difference to their performance.

• REVIEW EXISTING CLIENTS

The simplest approach is to introduce only new clients to the fee-based service. But it’s likely that, over time, brokers will move existing commission-based clients to the new model.

A word of caution: take time to explain the rationale behind the proposed move. Brokers must resist the temptation to impose change. They need the full support of customers first. Clients should feel it’s in their best interest to make the move and that they will receive better value for money.

It’s important to divide clients into those that are the most profitable and/or have the most potential to grow, and those that are the least profitable and have least potential to grow. Once the broker knows the true cost of its clients, it may even be time to let some of them go and focus on those with higher growth potential. IT

David Grier is managing director of Alphatec, which makes a time management system