The second set of client relationship model rules, known as CRM2, will make it mandatory for you to provide full disclosure of the fees your clients pay and how you are compensated. The way you conduct that discussion with your clients is critical in maintaining their trust.
“The best advisors are the most transparent,” says Dennis Tew, chief financial officer with Franklin Templeton Investments Corp. in Toronto.
Adds Prem Malik, financial advisor with Queensbury Securities Inc. in Toronto: “By being upfront about fees and how you get paid, you earn clients’ trust and confidence.”
Here are four ways to discuss fees with your clients in a way that helps build that trust among your clients:
1. Explain your value
Describe what you do for clients: from advice to portfolio construction, monitoring and, most important, looking out for their best interests by helping them achieve their financial goals.
“Explain that you get paid for the work you do,” Malik says. “And explain how you get paid,” whether by commission, trailer fees or a percentage of assets.
2. Go into detail
Fees can be complicated, Tew says, but they should never be glossed over. Clearly explain the various embedded and un-embedded fees associated with the products you provide. Malik recommends pointing out the difference between the fees you receive and how much goes your firm.
Explain how fees associated with various products, such as mutual funds and other managed products are applied, as well as transaction fees associated with trading equities and fixed-income securities. If your total fee is an aggregation of several components, such as advice, service and access to other professionals, provide your clients with a breakdown of those components.
3. Provide context
Show clients where you fit into the range of fees charged by other advisors — if you have access to that data.
If you’re offering a tiered fee structure based on client assets, make sure your clients are aware of the cutoff points for each fee level. You must be willing to be flexible, Tew says, and provide choice to clients rather than using a hard and fast fee structure.
4. Revisit the “fee” discussion
Fees should not be a one-time discussion; they should be reviewed periodically. Some clients may forget what you told them in the initial discussion. Try going over your fee structure at each annual or semi-annual review. It may also become necessary to revisit the topic if you have a tiered fee structure and your client has moved to a different asset level.
Be aware of media coverage about fees and compensation, Tew says, which can have an influence on clients’ opinions. You must be prepared for questions and be able to address such coverage and put it in context relative to the value you provide.