An open and straightforward discussion with your clients about the fees they pay and how you get compensated can go a long way in earning their confidence.
Full disclosure about fees enhances the trust clients have in you, says Heather Holjevac, a certified financial planner with TriDelta Financial Partners in Oakville, Ont. When you are up-front about discussing fees, she adds, “clients tend to place greater value in the advice and services you provide.”
When clients’ portfolios are performing well, they don’t tend to pay much attention to fees. But when markets are not performing well, clients may question the fees they pay. “You never want to have the problem of a client saying, ‘You never explained your fees to me’,” says John Nardi, a financial advisor with Edward Jones in Mississauga, Ont.
Here are some ways to discuss fees with your clients:
> Describe with clarity
Do not underemphasize the importance of fees as an integral part of your discussions with clients. Always describe fees clearly and explain different types of fees, says Holjevac. Whether your fees are a percentage of client assets, transaction-based commissions, fees for services such as financial planning or a combination any of those, your clients deserve to know what they are paying and how those fees are assessed.
And it should not be a “five-second discussion,” says Holjevac. Take the time to cover all the details and answer any questions the client may have.
Also, clients should be informed about fees associated with different products, such as the management expense ratios of different types of mutual funds or the transaction costs associated trading equities or fixed-income securities. “When clients don’t know how you’re getting paid,” Nardi says, “questions arise about your motivation for recommending a particular product.”
> Provide context
Clients are not necessarily aware of different fees and fee structures. By doing a little research, you can show clients where you fit into the range of fees charged by other advisors. You can benchmark your fees against industry standards, allowing you to show that your fees are competitive.
“It’s important for them to know that you’re aware of what’s happening on the street,” advises Nardi. By doing this “you are disarming clients” who may have questions about fees even before they are asked, he adds.
If you’re offering a tiered fee structure based on size of client assets, make sure clients are aware of the cut-off points for each fee level. “People place more importance on fees, the higher their assets,” says Holjevac. Also, if your total fee is an aggregation of different components, such as advice, service or access to other professionals, provide them with a breakdown of those components, she adds.
When explaining fees associated with products, make comparisons to similar products to show clients why you may have chosen a particular one. For example, show that you opt for the fund with lower fees when deciding between two funds of similar mandate and performance.
> Review periodically
Fees are not a one-time discussion, says Holjevac. Some clients may forget what you told them and some clients may want you to put your fees in writing.
Adds Nardi: “Some clients feel more comfortable when you explain to them periodically how you are paid.”
IE