Having the big talk

However, this is not a discussion you can avoid. The earlier you get it out of the way, the more comfortable you will become with your clients.

You should be aiming to be in a position of trust and integrity, which is enhanced by full disclosure about the fees your clients will be paying, says Heather Holjevac, a certified financial planner with TriDelta Financial Partners Inc. in Oakville, Ont.: “Fees are something you want to be upfront about. [When you are], clients tend to place greater value in the advice and services you provide.”

Mahesh Dwarkaprasad, project manager with Toronto-based Octane Capital Inc. says, “Being straightforward with your clients about how you get compensated can go a long way in earning their confidence, which is essential to maintaining trusting, long-term relationships.”

Failure to discuss fees can cause you to lose face with your clients, says Aiman Dally, CEO of Copia Financial Solutions in Toronto. When clients’ portfolios are performing well, clients do not pay as much attention to fees as they do when markets are not performing well. Says Dally: “You never want to have the problem with a client saying, ‘You never explained those fees to me’.”

Fees should convey a balance between the services you provide and what you expect your clients to pay, Dwarkaprasad says. “Be proactive,” he says, “and take the lead [in the fee discussion].”

You should not underemphasize the importance of fees, Holjevac cautions, and the discussion should “last more than five seconds.”

Explain your fees clearly and explain the different types, Holjevac says: “Whether your fees are a percentage of client assets, based solely on commissions or a combination of both – or for services such as financial plan preparation – your clients deserve to know what they are paying for.”

It might be appropriate to show your clients how your fees are calculated.

Your clients also should be told about the fees associated with different products. These would include management expense ratios of mutual funds or the transaction costs associated with trading securities. This disclosure, Dally says, can prevent questions that can arise about your motivation for recommending specific products.

Full disclosure about your fees is part of your duty as an advisor, Dwarkaprasad says. “It can also demonstrate your integrity to clients,” he adds. “The fee discussion should not be complicated to the extent that it can confuse the client.”

When explaining the fees associated with products, make comparisons to similar products to give clients a reason why you may choose a particular product. The same should be done with different sales strategies. For example, compare deferred sales charges with low-load commissions on mutual funds.

Clients are not necessarily aware of the various fees and fee structures, so you may wish to justify your fees by using competitive research to show them where you fit into the range of fees charged by other advisors. You can benchmark your fees against industry standards and show how competitive you are.

If you’re offering a tiered fee structure based on size of client assets, make sure your clients are aware of the cut-off points for each fee level.

“People place more importance on fees the higher their assets,” Holjevac says. As well, she adds, if your total fee is an aggregation of components, such as advice, service or access to other professionals, provide your clients with the breakdown of the components.

Even if your clients do understand the fees they are paying, you should revisit the subject periodically.

“Fees are not a one-time discussion,” Holjevac says. Some clients, she says, may forget what you discussed earlier.

And Dwarkaprasad advises: “You may want you to put your fees in writing.”

© 2012 Investment Executive. All rights reserved.