Discussing fees is never easy. When I started my first business I found talking about fees extremely difficult. To say, “this is how much I am worth” and then to have the confidence to deliver was hard. So I tended to prevaricate, talk about hourly rates or successes. Eventually, of course I learned that to build trusting relationships, I had to be up front about fees. But it is human nature to avoid that which is difficult.
Advisors are no different, while they will talk about fees in the abstract – like 1% of assets, they are less likely to say, “that’ll be $3,000 per year.” That’s because 1% sounds reasonable while $3,000 is a large number and it sets up expectations for a certain level of service. What do I get for that? How often? When? What happens if…?
Can you image Tiffany saying, “that wedding ring will be 1% of the cost of the wedding”, not $3,000, or your BMW dealer saying “the car will be 1% of your earnings over several years rather than $50,000?” You’d probably think they are trying to, “pull a fast one.”
Yet financial advisors have been stating fees like this for years. A recent study of investors showed that 31% of those surveyed thought they were paying no fees and even those who were aware there was a fee, rarely knew exactly how much they were paying.
It stands to reason that when these clients find out exactly how much they are paying in fees, there are likely to be a lot of uncomfortable discussions unless advisors get out in front of it. Those who haven’t already done so had better start the discussion before new regulations make it unavoidable.
How to start the conversation
Be honest. State in clear language, not jargon, not just percentages but in dollars and cents, the actual fees they are likely to pay.
- Currently, our fees are, 1% of assets, which is $3,000 per year for someone with your asset level.
- That’s neither the highest nor lowest available in the market place.
- The percentage you pay is tied to your asset level, it can range from: 2% to 0.5%, which is $6,000, down to $1,500 (if you do it yourself).
- As your account grows, the percentage you pay decreases. For instance,
– with assets of $500,000, fees are calculated at 0.0085% which is about $4,250
– at $1 million fees are calculated at 0.0075% which is about $7,500
– at $2 million and above fees are calculated at 0.0065% which is about $13,000
Give them a copy of your fee structure and offer to review it with them. Go slowly, pay attention to the level of comprehension of your client. Be prepared to stop and answer questions. Never be condescending if they need something repeated.
However, don’t be surprised if, when they hear the actual dollar amounts, you get some push back. You need to understand that the fees you disclose will be seen in terms of the service you provide. Fortunately this can present a perfect opportunity to outline the value of your service.
Tell them what your fees include, such as listening to them and understanding what’s important to them. Let them know, that with your expertise you can deliver the best strategies for getting them to their goals, that you will discuss the plan with them on a regular basis and that you are committed to monitoring how their portfolio is doing against the plan and make adjustments along the way as needed.
At this time you can ask them outright, if they are happy with your service, or is there anything else, within reason, that you can do for them to make for a better relationship. Then be prepared to follow through.
The take away: Discuss fees sooner rather than later, put fees into the context of the service you provide, be clear (plain language, no jargon), be thorough, make sure you are understood and put everything in writing.