Investors seek predictability and transparency in fee structure. Yet, historically, they have had trouble understanding, let alone benchmarking, the fees they pay their financial advisor. In fact, our research finds less than 1/3 of clients truly understand the advisory fees they are charged. Clients’ confusion over what they are paying for, how the amount is determined and the value they are receiving for the price can become a source of friction or even dissatisfaction.
However, if you’re upfront and explain the value clients receive for their fees, they are significantly more likely to agree with these statements:
- The fees/commissions my advisor charges are fair
- My financial advisor provides objective advice without regard to the fees or commissions I pay
- Based on my recommendation, a friend or family member has become a client of my financial advisor
There’s no right or wrong fee structure; it is all about how you operate within your fee structure. Our five-step strategy that I introduced in a previous post can help you communicate your services and fees (and the relationship between the two) with confidence, clarity, and transparency.
Let’s take an in-depth look at Step One: Be upfront, consistent and concise. Specifically, when addressing fees, you should:
- Articulate your overall value proposition, and link that proposition to your services, before fees enter into the conversation. Waiting for clients to inquire about fees unfairly puts the onus on them to be assertive. Proactively taking the lead establishes transparency and helps you thoughtfully manage the conversation.
- Place your fee structure and value of services in context. It’s up to you to demonstrate that your price is worth their investment in a relationship with you. Give the client the information he or she needs to be confident and help them assess what’s fair and reasonable by using an illustrative example of your compensation against that of other advisors (see chart below).
For illustrative purposes only
Source: SPDR University: Discussing Fees with Clients, James Grubman, PhD.
- Keep it simple and personalize performance, spelling out the important things that really matter and collaborating with your clients on how you will seek to accomplish those goals. You are not offering a “one size fits all” partnership. Investors value financial advice that they perceive to be highly customized. Define a formula for sustainable returns to account for their unique goals, align your fees with the value you deliver, and be fully transparent so your client can appreciate that value.
- Timing and consistency matter. A fee and services discussion should happen at the start of any new client relationship, but not be limited to a one-time event. It’s important to foster an ongoing dialogue, not only to improve comprehension, but to authentically establish trust.
Today’s post-crisis investment market is ever changing. Investors are wary and pushing for more price transparency, making it more important than ever to promote the value of your advisory services to clients. Talking comprehensively about the sum of what you can and do deliver improves the likelihood that clients clearly understand what you are charging them and what services they are receiving in return.
Watch for future posts in our Price of Financial Advice discussion series where I’ll cover the next four best practices in our five-step strategy, starting with Step 2: Ensure Comprehension. In the interim, additional resources to help you guide and engage your clients are available on SPDR U.
A nationally representative sample of 300 financial advisors and 300 individual investors participated in the survey fielded August 8-20, 2014. The sample consisted of advisors with an average account under management of at least $500,000 and investors with a household investment portfolio of at least $150,000. Quotas were established to ensure the sample reflected financial advisors across different retail advisory channels and investors across a range of investable assets.
This article was written by Brie, Vice President of State Street Global Advisors and the Head of Practice Management.