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 Some fear clients will feel sticker shock when hearing they need to
pay fees out of pocket instead of having costs deducted from
investment accounts. Advisers also worry clients may question why
they’re now paying a fee equal to one percent of their assets under
management, instead of a fraction of that for their load funds.
The problem is that most investors don’t understand how adviser
compensation works or how it affects the services they receive, says
John Anderson, a practice management consultant with SEI Advisor
Network, a unit of SEI Investments Co in Oaks, Pennsylvania. Many
investors do not know what it means for an adviser to be a
fiduciary, or somebody who acts in a client's best interests,
Anderson says.
A 2011 study by Cerulli Associates, a consulting firm in Boston,
showed that 31 percent of investors thought financial planning
services were free and one-third didn’t know how they paid for
advice. What's more, most investors prefer to pay hidden commissions
instead of account fees, according to Cerulli studies.
Some clients might push back when advisers begin asking for fees,
but their concerns usually dissolve once advisers show clients the
benefits.
FOCUS ON SERVICES
Morgan Smith, an adviser in Austin, Texas, explained the ethical
obligation of a fiduciary to his clients when he transitioned to a
fee-only practice. “I asked, ‘Would you rather work with someone
whose compensation structure has nothing to do with your best
interest or someone whose structure is based on your best interest
and goals?’” he says.
Every client except one, a day trader, stayed on. But some asked why
they would pay him if their investments declined. He told them his
advice would pay off more in a down market and that “when your
investments go down, I get paid less,” he says.
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Sheryl Garrett, whose Garrett Planning Network includes more than
300 fee-only advisers, says clients need to understand the
difference between advisers who can afford to give advice because
they sold a product and advisers who are objective because they have
"no skin in the game.”
Clients who are paying for advice also need to know what other
problems advisers are solving in exchange for the additional
compensation, says Anderson. He tells advisers to create a one-page
list of their services. That may include rebalancing clients'
portfolios and analyzing their future social security benefits.
He also starts client conversations by highlighting what they've
recently accomplished, such as filling in paperwork to name
beneficiaries for IRA accounts.
Anderson and Garrett both believe in showing clients that their
daily decisions have more of an impact on their finances than the
investments or insurance products they buy. It’s a holistic approach
that often wins over clients, they say.
(Editing by Suzanne Barlyn and Paul Simao)
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