Be prepared to justify your fees

Apr 27, 2014 @ 12:01 am

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A financial adviser should never get caught off guard — or show surprise or resentment — when a client raises a question about fees. After all, surveys have shown that financial advisory fees are widely misunderstood.

A 2011 study by Cerulli Associates Inc. found that 33% of investors did not know how they paid for investment advice, and 31% said they thought the advice they got was free.

You can't blame the public for being confused. Advisers are compensated in many different ways, and not all practitioners are as candid as they should be about how they get paid. The North American Securities Administrators Association Inc. released a report last week which found that fee disclosure was wildly inconsistent among the 34 broker-dealers it surveyed. The disclosures were embedded in documents that ranged from one to 45 pages.

In last week's issue of InvestmentNews, reporter Liz Skinner wrote that clients are increasingly asking advisers to explain their fee structure — and in some cases, to justify the amounts they are being charged. In some instances, they are successful in getting their advisers to lower their fees.


This trend could be having a broader impact on fees. PriceMetrix recently reported that fee-based advisers are receiving a lower percentage of the assets they manage. The practice management software firm said advisers generated an average of 0.99% from fee-based accounts last year, down from the 1.06% they earned in 2012 and the 1.14% they got in 2011.

Clients have their eyes on fees for several reasons. For one, federal agencies are talking more about them. The Labor Department has adopted new rules requiring retirement plans to clearly spell out 401(k) fees to plan participants. And the Securities and Exchange Commission issued an alert in February that urged investors to seek more disclosure about fees from their advisers.


There is also more competition in the marketplace. Online discount brokers and, more recently, online advisers are ratcheting up their efforts to get the word out that there are less expensive alternatives to meeting face-to-face with a financial planner to obtain advice.

What is a traditional financial adviser to do?

First, be prepared. Nobody wants to stir up a hornet's nest unnecessarily, but consider getting out in front of this issue.

If you haven't reviewed your fee structure lately, by all means do so and make sure you are competitive. Then make a list of all the services you provide for the fees you charge. During the review, consider adding low-cost exchange-traded funds to the investment products you use.

Come up with a communications strategy. For instance, if you reach out regularly to your clients through a newsletter, devote at least one issue a year to reviewing your fee structure, pointing out the range of services they are receiving for their money. Make sure this communication is written clearly. There is nothing more frustrating than reading something that is supposed to inform and educate, only to discover that it is larded with industry jargon in a misguided attempt to impress — or worse, to obfuscate.


If clients call to discuss fees, greet them warmly. Don't get defensive, and don't dodge the issue. Try to determine if they are satisfied with the services you are providing. If they are, then it should be easier to retain them. Explain what they are getting for their money and why you think your fees are fair. Remind them why they came to you in the first place, and how much progress you have made together in getting their financial life in order and reaching their goals.

It might seem counterintuitive, but you actually might get more calls about fees during bull markets. Stocks are top of mind, and your clients might feel they can get the same performance by simply investing in low-cost index funds. They may question whether the 1% of assets they are paying you is worth it. You may have to point out that investing is a long-term process and that the diversified portfolio you have constructed for them should withstand both good and bad years.

Above all, don't take it personally. No one likes their value in the marketplace to be questioned, especially if you feel you are working to the best of your ability on your clients' behalf. But clients are consumers, and they have a right to determine if they are getting the biggest bang for their buck.


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