If advisors asked their clients how they got compensated, how many clients would get the correct answer? I think that more than 50% of them would get it wrong.
But as fees continue to outpace commissions, advisors have an opportunity to change the relationship with their clients and to increase transparency. That’s good for both client and advisor.
WHAT CLIENTS WANT
The clients we really want are successful and smart. And if they are truly successful and smart, don’t we need to be transparent with them about fees? Eventually they will figure out how we are being paid.
I recently had a very good client tell me in a meeting that we needed to adjust fees. It made me wonder if she thought ours were too high. When I asked her to give me more information, she proceeded to tell me that as her assets grew and she placed more with us, her fees would rise. She said that she trusted us and that we were performing well, but she was uncomfortable with not knowing the exact dollar amount she would be paying quarter-to-quarter.
What this client was really expressing was her desire to feel confident about a diligent, trustworthy relationship that is worth the cost.
For her, I changed our billing arrangement to a flat fee, from a percentage fee based on the assets we manage. I also told her that we would review it annually. She was more comfortable and so were we.
A great way to start a fee discussion is to start with value. Ask your client how you (and your firm) are doing. Great questions to ask to start the discussion are:
“Have we dropped the ball anywhere?”
“How have we brought the most value to you in our relationship?”
These questions and discussion will allow you to gauge how much value you bring to the client. It will also give you insight into what the client wants from you regarding issues that need to be solved.
The likely outcome of such a conversation is that the client values what you do for them more than you do! In other words, you are not charging enough. It’s also a great way to start a referral discussion. For more on the referral discussion, I suggest that you read Don’t Keep Me a Secret by Bill Cates.
As a result of this client conversation and others, we have become much more flexible in our fee arrangements. I believe we will migrate towards more flat fee arrangement with many of our clients that we review annually. A flat fee removes risk for the client and provides certainty for us regarding revenue.
Whether advisors are paid a percentage fee, a commission, an hourly rate or a fixed fee is irrelevant to our best clients. The real point is how those fees are packaged. Start with telling clients the truth: “You are compensating us fairly for our talent and experience.” The ultimate goal is confident clients who understand what they are paying for and why it’s worth it.
This may require the advisor to tailor a fee package that is most convenient for each client. In our firm, we ask the client “How would you prefer to pay us?”
Overall, the best advice is to keep it simple and transparent. Make sure your clients could answer the question, “How is your financial advisor paid?”
Gene McManus, CFP, CPA, is a partner at AP Wealth Management LLC in Augusta, Georgia.
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