Investment fees remain in the spotlight amid recent regulatory changes that force financial institutions to provide more clarity around how those costs appear on investors’ statements.
While the latest changes to the client relationship model, or CRM2, now require investment fees be shown in dollar amounts (which is considered more transparent), it’s still up to advisors to have a conversation with clients about their compensation.
“Not talking about compensation is wrong,” says Keith Costello, president of the Canadian Institute of Financial Planning. “If I were to hire a professional to come to my house and do something, before they did anything, I would ask about the costs. Why is that any different than getting professional [investment advice]?"
Not only should fees be an upfront discussion with investors, in particular potential new clients, but Mr. Costello also believes the conversation should include the different compensation models on the market, not just the one chosen by the advisor.
“The biggest mistake is deferring compensation discussions, not educating people about the various models and any potential effects on their objectives,” Mr. Costello says. “The more upfront you are about it, the better off you’re going to be in this more transparent environment we’re in today."
Timing is everything
Like most conversations about sensitive subjects, when to bring up fees is also important, says Moshe Milevsky, a professor of finance at York University’s Schulich School of Business in Toronto.
He says advisors should never lead with what they charge, but first they should discuss the service they believe they provide and how it may differ from other fee models and competition such as lower-cost exchange-traded funds and robo-advisors.
“Start with what you’re doing, where you’re adding value, and then discuss how the compensation model you use works,” Dr. Milevsky says.
When to bring it up in the conversation is also key to gaining trust from clients. “The wrong approach is to do it too quickly, too aggressively,” Dr. Milevksy says.
On the other hand, it’s a mistake to wait too long to talk about fees, prompting the client to ask, which could create a perception you were trying to avoid it. “You should be the one to bring it up first,” he says.
Get some background
The initial conversation with a client, before fees, is also where advisors should take their cues on how to approach the compensation talk.
Dr. Milevsky says advisors need to learn about the client’s investing history, including whether they’re also working other advisors and/or a robo-advisor.
“You have to know where they’re coming from and tailor your script accordingly,” he says.
For instance, the conversation might be more about damage control and repair if the investor just broke up with his or her advisor and you’re the rebound.
“If the answer is they had a bad experience, the conversation will be very different than if they’ve never spoken to anyone about money,” he says.
The best financial advisors not only listen to what the investor tells them about their investing history but also how they feel about the capital markets and the overall financial system. “It’s a very different conversation when the money has been kept under the mattress, in a box,” Dr. Milevsky says.
Adding and aligning value
Given the growing competition in the market, particularly with passive investment options such as many exchange-traded funds and robo-advisors, Dr. Milevsky says advisors need to offer more value for their fees. That may include broader discussions such as tax planning and education for children or grandchildren, to help flesh out a financial plan.
“You’ve got to come up with a value proposition,” he says. “You have to start illustrating some of the other things you do that aren’t investment related, whether it’s the process, the consistency, whether it’s giving value-added education or access to tools they didn’t have.”
The client should also believe in the value of investment advice. For some advisors, that means seeking out clients that support their compensation model and believe they are bringing something to the table, says Norm Trainor, president and CEO of the Covenant Group, which provides coaching to financial advisors on how to grow their business.
“You only want to have a conversation about compensation with someone who fits your ideal client profile, someone who is a value buyer, as opposed to a price buyer, unless you have the lowest cost, then you focus on that,” Mr. Trainor says.
“You’re not trying to convince someone to do something they’re not inherently motivated to do. You start with their motivation.”
No calls, please
Finally, when it comes to the right place to talk about fees, in person is always best, Dr. Milevsky says.
Advisors should never start a conversation about fees by phone, or e-mail because they’re considered less personal forms of communication.
That said, Dr. Milevsky does recommend sending an e-mail to the client after a meeting summarizing the discussion, including fees, which can be used as a reference down the road.
For instance, when markets go down and the investor complains about fees, the advisor can point to the documented discussion.
“It’s about protection for them when the markets aren’t doing well,” he says.