Despite the high hopes of regulators and the efforts of wealth management firms to provide additional disclosure around fees, not that much has changed since the introduction of CRM2 and POS a few years ago. Investor understanding of fees has somewhat improved, according to a recently released CSA study. More investors now say they’re aware they pay fees and 51% say they know that fees have an impact on their returns, up from 41% in 2016. But that still means that half the population is basically in the dark about their fees.
While concerted efforts by regulators, industry groups and wealth management firms to increase investor awareness about the costs and performance of their investments have started to move the dial, it appears there’s still a lot of work to do. What can you, as an advisor, do to help clients understand the fees they pay — and why should you do it?
Advisors are in a unique position of trust with clients. The CSA study showed that four out of five Canadian investors were “satisfied” or “very satisfied” with their advisor in 2019. A recent North American survey about changing financial habits as a result of the pandemic revealed that 65% of respondents prefer human expertise when receiving financial advice.
As well, a new Dalbar study regarding the Covid-related market downturn found that 86% of North American investors said they’re significantly or slightly more confident in their financial professionals as a result of the proactive communication and advice they received from their advisors during that time.
So the trust in your advice is there, which positions you well to continue to help educate clients on things they care about. Although clients don’t want all the details, they do care about fees. They want to understand the fees they pay and the impact of those fees on their investments and goals. They also want to know that you’re keeping an eye on those fees. The challenge for you is to maintain clients’ trust in the face of their changing expectations and the digitization of parts of the advice model. Ironically, talking to clients about fees will actually increase their trust in your advice.
Here are some steps advisors can take:
Be clear about your value proposition
Although a large percentage of investors recognize the value of advice and appreciate their advisors, there has been a slight uptick in dissatisfied investors who are thinking about switching advisors. Perhaps all the advertising that educates investors on the impact of fees and undermines the value of advice is having some impact. Advisors should be clear about their value proposition and not leave clients wondering what they’re getting for their fees. Demonstrate how you can help clients identify and articulate their goals, track progress toward those goals, and provide trustworthy advice and guidance during these disruptive and disturbing times. Keep communicating with clients – the Dalbar study shows that they appreciate proactive communication.
It’s about the relationship, not just the product
Now more than ever, amid the constant swirl of uncertainty, clients are paying for advice, peace of mind, a financial plan to achieve their goals and the reassurance that they’re going to get there. Clients are generally agnostic about product, as long as it helps them make progress toward their goals. They’re increasingly looking to their advisors to be investment strategists and coaches, and not just to provide product recommendations.
Have a proactive conversation about fees
In 2019, 51% of clients knew that fees had an impact on their returns vs 41% in 2016, according to the CSA study. But clients also reported having fewer fee discussions in 2019 prior to making a purchase. This is puzzling. If client awareness of fees is growing, why are fee discussions not increasing? Perhaps some complacency has set in. Perhaps advisors feel that, now that the CRM2 compliance blitz is over, they have done their duty.
It’s important to have the fee conversation – in fact, to initiate the conversation. Clients’ trust grows when you’re transparent about fees and when you demonstrate you’re looking out for them by recommending products with appropriate and competitive fees.
Consider new fee models
If your firm is open to alternative fee models, consider whether there are options for your practice. DSC funds are being phased out (and many firms have already eliminated them), and trailing commissions have already been compressed. Gaining in popularity are fee-based models based on a percentage of a client’s assets under management. For investors with lower asset thresholds, some advisors are even considering a subscription-type model or fee for service, where clients just pay for the planning services or advice they need.
Measure performance and progress
Having said all that, too much focus on fees can also lead to the wrong conversation and outcome. Clients don’t want (and can’t comprehend) all of the complexity around how fees work in our industry. Rather, they’re looking for a general understanding of the fees they pay, and importantly, they are comforted when their advisor initiates the conversation. Be sure to balance the fee conversation with discussions about goal-setting and performance.
We can’t take our foot off the gas on the regulatory front either. One of the requirements of the client-focused reforms is that advisors focus on the impact of product costs on returns when making recommendations. This requirement will be in effect next year. In anticipation of this new obligation, you should remind clients of the impact of fees on investment performance over the long term.