In an ideal world, the following statement should be obvious and the widespread standard: all professionals, including but not limited to those in the financial planning industry, should at all times be open and transparent in their financial dealings with clients. This includes their fee structure and all fees they may charge the client for professional services rendered. However, complete fee transparency, where clients believe they completely understand their financial advisors’ fees, is unfortunately not the norm in the financial planning industry.
The numbers are staggering. For example, in the “Financial Advisors’ Value Proposition and Compensation” study conducted by State Street Global Advisors, the study results show widespread confusion when it comes the topic of fees: only 53 percent of financial advisors believe their clients completely understand their fees; and a mere 33 percent of clients report that they completely understand their financial advisors’ fees.
Why the great mystery surrounding fees? Some cite “squeamishness talking about money”, complex fee models, the understanding/knowledge differential between a financial planning professional and a client/layperson, or a client’s reluctance to ask his or her financial advisor what they perceive as “stupid” questions about fee structures. Whatever the reason, one thing remains the same: this type of fee structure opaqueness should be seen as grossly negligent in the financial planning industry and never tolerated. There is an immediate need for change. Fortunately, you can make straightforward changes to increase fee transparency with your clients.
To expand your network of clients and ultimately take on higher net worth clients, it is absolutely necessary to establish fee transparency from the very beginning of the financial advisor/client relationship. Client trust maintains, builds, and expands a financial advisor’s professional relationships. To establish more trust, you need to be more upfront with your clients about the fees they are being charged for your professional services. In fact, a financial advisor’s fee value proposition—what the client thinks the value of the services they are paying for is—is directly correlated to fee transparency. When clients don’t understand what they’re paying for or feel mislead over fee arrangements, they trust their financial advisors less and are resultantly less likely to refer them to others.
Here is a non-exhaustive list of ways to increase fee transparency with your clients:
- Be upfront and clear from the beginning: From the out start, financial advisors should be 100 percent transparent when it comes to explaining their fee structure to potential or existing clients (as well as explaining any changes to the current fee structure to clients). At a bare minimum, clients need a clear picture of these three things: (1) What they pay in fees and commissions; (2) A specific rundown on how much they are charged for transactions; and (3) An annual summary the client can send to their tax preparer/accountant every tax season.
As a financial advisor, you should be able to clearly define the following for your clients (again, this is a non-comprehensive list):
- Your complete fee structure so clients 100 percent understand how you are paid;
- Clearly define which portion of the fee is paid out to the financial advisor, to the firm, or to an independent broker-dealer firm;
- Whether you charge on a tiered-rate system;
- Whether you receive commissions on the assets you invest;
- Whether you receive payments from investment or mutual fund companies that you recommend;
- How hourly fee are calculated (i.e., does the financial advisor bill in 6-minute increments; are quick phone calls and emails billed?); and
- Aside from what you a client pays you, what other costs can be incurred (i.e., a research fee, or admin fees such as photocopying fees)?
- Keep it simple to ensure comprehension: Using big words and financial jargon isn’t going to impress your clients, but rather will just confuse them and decrease their trust in you. Assess each client’s financial literacy and knowledge; then accordingly, explain your fee structure to them using terms they will understand. Always leave time to ask the client if they have any questions about your fees.
- Put it in writing: Details about fees can get lost in translation and misinterpreted in the context of a larger in-person conversation. To avoid this, simply put it in writing. Have a hard copy and a digital copy of your fee structure and perhaps a “FAQs about Fees” document immediately available for your client’s perusal.
- Be consistent: The client’s annual review is an opportune time to review your fee structure and ask the client if they have any question about fees. Fees and services discussion should not only be happening at the beginning of financial advisor/client relationship but also throughout the course of the relationship. Ongoing dialogue will improve the quality of your relationship and increase trust.
We encourage you to take a closer look at all that Summit has to offer and find the best fit for you and your financial planning practice. Let us show you why we have been voted the #1 independent boutique broker-dealer in the country.
Summit Brokerage Services is part of Cetera Financial Group, RCS Capital Corporation’s (NYSE: RCAP) retail investment advice platform.
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