advisor client meeting

Transparency is often the goal of regulatory change. But this article is not about regulation. Instead, it’s about why meaningful transparency is good for clients and good for business.

Earlier this summer I was visiting with old friends who shared the news that they were about to list their house for sale. After some conversation about why and where they were moving, we got to talking about how they chose their realtor.

It turns out they ran a reasonably sophisticated realtor selection process. They interviewed four candidates and asked each to make a presentation. The realtor they chose was a last-minute addition to their process — they had driven by a “For Sale” sign with his name on it, and decided to add him.

I asked why they chose this realtor. They said each of the candidates made a polished presentation. All four had extensive experience, worked in their neighborhood, and by all accounts were successful at selling homes. Two were even referred by friends. The realtor they chose was not one of those referrals; he was unknown to them until they saw his sign.

So, what was the differentiator? I was surprised to learn it was transparency — specifically fee transparency! They said they were impressed that this candidate tackled the issue of fees directly.

The realtor’s fee is often the object of considerable consternation among people selling their homes. “What! They make how much money for a few days’ work?”

Only this realtor explained to them how the fee worked, and, importantly, what he and his team did for the fee. He outlined in some detail their services (including many behind-the-scenes services) and helped my friends understand the value that he and his team provided.

Of course, the other candidates had all mentioned the fee too. And I’m certain at least some of the other candidates would have provided the same services, perhaps even at the same or greater level of quality. The only difference was that he chose to talk about the fee and the value his team provided.

This is the power of transparency. He won a client and will have a chance to provide that value and earn that fee. The other candidates will not.

Turning back to our industry, is it possible that things are different? That investing clients understand the work involved in the background that is invisible to them? In my view, it’s not possible.

Our industry is complicated and difficult for an outsider to understand. I know that most advisors deliver real value for the fees they charge, but, without an explanation, clients are not in a position to assess the value, or even to grasp all that’s involved. Their view into our industry is too often a series of disconnected forms and processes.

How can we harness the power of transparency? Regardless of what new disclosure requirements are coming (and of course, total cost reporting is coming), start talking to your clients about fees. Here are a few tips to have meaningful fee conversations:

Keep it simple. This has become my motto (truly — check out my LinkedIn profile!). Avoid all acronyms and secondary concepts that are difficult to understand.

Instead, explain fees in plain English, and assume a client knows none of our terminology or concepts. If they chime in that they do, OK. But don’t go too far down that path; it’s unlikely they have more than a surface knowledge in most cases.

Avoid too much detail. I remember talking to one advisor a few years ago who took the idea of fee transparency to heart; however, she thought this meant a 20-minute conversation about the fees a client paid!

Not only is that a huge demand on the advisor’s time but also it would be wasted on the vast majority of clients. Worse, it could lead to clients becoming disengaged.

The goal is to:

  • provide a high-level explanation of the types and amounts of fees paid (and not line by line from a fee report);
  • provide clarity about how fees impact performance and how you assess fees versus value from investment products; and
  • demonstrate an openness to answering the client’s questions.

The conversation should not take more than a couple of minutes. After that, you’re trying the client’s attention or patience or both, instead of benefiting from the transparency.

Talk about value. An advisor’s value is differentiated, so it’s not possible to set out what an individual advisor’s value proposition should be. However, I will take a stab at what kind of value proposition will not resonate with clients:

  • “I deliver the best returns.” This is hard to promise and harder to deliver consistently, especially at a reasonable risk. In any event, research consistently shows that clients value service over returns. They generally aren’t seeking out-of-the-ballpark returns if that means high levels of risk. They just want their money to grow and to be able to buy that car, retire when they want, and so on.
  • “I have access to the best products.” This is not relevant to clients. The number and variety of investment products available are, at best, confusing to clients.

Instead, always remember that this relationship is about the client and their goals, hopes and dreams. So be sure to include in your value proposition how you capture those goals and help meet them. It’s not about filling out KYC forms — that’s not value. It’s about taking the time to really understand each client.

Remember that realtor. How helpful would it be for all of us as potential real estate buyers or sellers to understand how that 2% or 2.5% works and what we get for it? Turns out that, regardless of regulatory requirements, transparency is good for business.

Susan Silma is a lawyer and former regulator with a deep understanding of the client perspective, and is passionate about simplifying and humanizing the client experience in financial services.