How financial advisers should discuss their pay with clients

I consider you a member of the Secret Society of Real Financial Advisers. As a member, I assume you realize that your clients expect transparency when it comes to how you’re paid. Based on that assumption, I think you need to be prepared to answer two questions:
1. How do clients pay for the services you provide? (e.g., flat fee, percentage of AUM, etc.)
2. How are you compensated for the advice you provide?
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I know these questions sound similar, but there’s an important distinction. The first question deals specifically with how a client pays you for your advice. The second question deals with all of your potential sources of compensation that may include more than client fees.
Now, I know many of you only receive compensation from clients. That’s the simplest answer, but it’s not the only one. You may very well receive additional compensation from third parties.
Whatever your business model, and I’m not arguing right or wrong, you’d better be prepared to disclose that compensation. The last thing you want to do is appear uncomfortable or shifty when you’re asked these questions.
If you’ve struggled with these questions in the past, here are some specific suggestions.
1. Prepare for these questions. This means practice, practice, practice. What are you communicating with your body language and facial expressions? Just to be clear it’s normal to be uncomfortable talking about how you get paid. After all, outside your professional work as an adviser, when was the last time you asked someone how much she earned in a year? So cut yourself some slack and practice answering these questions. Your specific answers don’t matter near as much as the fact that you’re open and honest about it.
2. Consider initiating this conversation. Many of you already do so, but if you don’t, I want you to see what happens when you test broaching the subject first. You’ll know best, but I always thought an appropriate time was during the pre-client discovery meetings. Even if you don’t talk specifics until you’ve thoroughly diagnosed, don’t be afraid to make it clear you consider the subject of compensation an important one. You understand it’s a big commitment, and before anyone signs anything, you’ll discuss in detail both how they’ll pay you and how you’re compensated in general.
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Look, our industry doesn’t have the best reputation when it comes to transparency, particularly on the issue of compensation. But every time you have this conversation, you’re once again reminding people why they should want to work with a real financial adviser. I think that’s worth a little discomfort. Don’t you?
Carl Richards is a certified financial planner and the author of the weekly “Sketch Guy” column at The New York Times. He published his second book, “The One-Page Financial Plan: A Simple Way to Be Smart About Your Money” (Portfolio), last year. You can email Carl here, and learn more about him and his work at BehaviorGap.com.