The Fee Conversation: Your Clients Are Having It, Make Sure It's With You

It's not quite as awkward as having the birds and the bees conversation with your kids, but talking about fees with clients can be an adventure for some advisors. It doesn't need to be.Today, investors are more empowered than ever and they are hearing more and more about fees and how even seemingly minute basis point differentials can cause substantial sums of capital to be left on the table over time. Fees being a hot topic in the mainstream financial media coupled with clients' penchants for discussing advisors and investments with friends and family means at least one thing: clients are talking about fees.Whether or not they are discussing fees with you, their advisor, is another matter, but this conversation can go a long way toward building the trust that serves as the bedrock of a fruitful advisor/client relationship. Indeed, there is a gap to be closed when it comes to the fee talk.In 2016, State Street and Wharton commissioned a survey that turned up this, among other data points, 95 percent of advisors said they talked fees with clients, but just two-thirds of those clients said their advisor initiated the conversation . That's a good segue to one of the most vital topics in the advisor/client relationship: transparency.

Business Model Transparency

Most advisors work on fee-based models, but not all clients understand the intricacies of how the business works. Skeptical clients hear “fees” and think that's just more money heading into the advisor's pocket.To ameliorate this situation, explain the fee structure upfront to clients, even it seems like you're telling the client how you make a living. They're likely wondering about this in the first place and it speaks to highlighting your value proposition. Advisors usually structure fees around minimum account sizes, so if the smallest account your practice deals with is $250,000, the industry standard would be a fee of $2,500.“The virtue of having an asset minimum to work with a client is the sheer simplicity,” according to “If you set an asset minimum of $250,000 and you charge a 1% advisory fee, then you’ve effectively set a $2,500 minimum fee for clients, but it doesn’t require a special billing process, you don’t have to slap them in the face with the saliency of your fee or any other explanation about your minimum fees.”Another strategy used by some advisors is a minimum annual retainer fee. In this instance, is setting a minimum value on expected servicing costs of the client's portfolio. Here, the advisor can say to a client with $250,000 of investable assets that it will take a minimum of $2,500 per year to service that portfolio while detailing examples of how that $2,500 could be higher at the end of a year.In either example, a percentage of assets or the retainer model, the fee structure is transparent and should be easy to understand for clients.

Putting Costs Into Context

The reality is words such as “costs” and “fees” are viewed in a negative light and there's little advisors can do to change that. However, advisors can make fees more tolerable with proper context.Say you've got a client with $500,000 in assets and your practice operates on the percentage of assets model, meaning you earn $5,000 a year in fees from that client. Obviously, $5,000 is a fair amount of money, but on a per day basis, it works out to less than $14. Hearing it that way sounds a lot better than $5,000 per year.Cost context is also fertile ground for the advisor to highlight his or her value proposition, i.e. what the client is getting by working with the advisor and the all-inclusive nature of the services provided while eliminating the industry jargon so often used in years past to overwhelm clients.“Clarity is critical to helping clients understand your advisory fees,” according to E*Trade Financial. “Using hard-to-understand industry jargon may confuse clients and make the conversation more difficult than it needs to be. Make sure they understand what services your firm is delivering. Explain that the all-inclusive annual fee is for portfolio construction, ongoing investment advice, and portfolio transactions.”

A Valuable Acronym

As seasoned financial professionals know, the industry is awash in acronyms and jargon, but here's one that's never been used before that's applicable to fees and one worth remembering: ITT.
  • “I” for initiate. As in initiate the fee conversation with your clients. Don't let it happen the other way around.
  • “T” for transparency. The advisor can't get here without initiation. The “I” is the foundation on which this “T” is built.
  • “T” for trust. By initiating the fee discussion, transparency is a logical next step. As the client perceives her advisor to be proactive and open about cost structures, trust is built and client retention is facilitated.
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