How to Charge for Financial Advice - Part 2

Last week, in “How to Charge for Financial Advice - Part 1”, we focused on the massive hole we have dug for ourselves with respect to our fees. Not that we don’t deserve to get paid for our work, but we have done a poor job of demonstrating the value of the fees our clients pay.

Today, I provide you with the only fee structure that any advisor should ever use. Period.

The Right Fee Structure for Every Financial Advisor

There is only one right way to charge for your services as a financial advisor and as much as people will try and argue, I’m right.

The right fee structure is one that:

1. Is fully disclosed to the client at the outset of the engagement.

2. Allows you to provide all of the services you promise without regret.

3. Is not illegal.

That’s it. That is the right fee structure for every financial advisor.

Thanks for reading and I’ll see you next week…

Kidding.

The Fee Conversation

This is where I see the most problem in our industry. I used to start squirming when clients would ask about fees. I bet you have, too.

The reason I started squirming is because I actually felt like I was about to lose a sale by telling them what it would cost to work with me.

Maybe they would think the cost was too high or the structure of my fees were at odds with my ability to provide them unbiased advice. Maybe their friend was paying their advisor in a different structure or a different amount.

So, I would tip-toe in with my hat in hand and describe the fee structure of our firm in an apologetic way. I wish I had video. I am almost certain it sounded like:

I don’t care if you are on any of the fee structures above, you have squirmed before.

If you are like me, eventually you realized that you like to eat and live indoors. So you learned to proudly declare your fee structure to clients.

And this is where most of us stop. We are proud of the work we do and we are not ashamed of charging for it. But, this simply isn’t enough.

What does Full Disclosure Look Like?

I think telling our clients the headline number is a great start, but we need to do better. We need FULL disclosure.

When a client asks us what our fee is there are three things they are asking for and two of them they don’t know to ask, but if they did they would ask.

The question is “what is your fee” or some variation. We respond with our firms structure: Commission, % of AUM, Fee for Service, or Flat Fee. That is what they know to ask.

Full disclosure means answering the questions that they DON’T know to ask.

Portfolio Fees

I haven’t seen a portfolio yet that didn’t have investment fees of some sort, even if you are putting them into low cost ETFs. Part of full disclosure is to talk to them about these fees.

I don’t care how you do it, but you absolutely MUST tell them that the investments you select in their portfolio will come with their own fees.

This shouldn’t be controversial, but it it will be. Some of you are experiencing a rise in blood pressure as you are reading this.

There are so many arguments to be made about why this is impossible to disclose and I have heard them all.

All of those arguments are wrong.

This is your time to educate them. This is how to WIN clients for life.

Your Personal Compensation

Finally you need to tell your clients how YOU get money into your pocket. They don’t know this either and they don’t know that they can (and should) ask.

We live in a culture where it is impolite to ask people how much money they make and unfortunately clients also assume this extends to the mechanics of your income.

If you are following rule #2, you shouldn’t be ashamed to explain how money gets into your pocket.

You don’t need to explain your sales grid, or show them the firms bonus structure. But, tell them what happens to their fee when it leaves their account.

Tell them about how you compensate your support staff, tell them about your salary and bonus structure, tell them that insurance companies pay you a commission for the policies that you write, tell them that you receive certain incentives for certain products.

What’s that? You could never? I’d take a look at rule #2 again, if I were you.

Full Disclosure is the Future

In my own personal practice, when I embraced this concept, my business actually grew. What I found were clients hungry for someone to put all the cards on the table.

I lost a few prospective clients who thought they shouldn’t have to pay fund managers. They didn’t believe me when I showed them the internal cost of their current portfolio.

Or when I told them that they would find the same type of fees if they wanted a DIY portfolio.A

I guess the truth is, I didn’t lose anything. I gained.

I gained clients that believed in what I was doing for them and were happy to pay for my advice.

I gained confidence that my clients knew everything about what their money was doing both inside of their portfolio AND when it was debited to pay for my services.

I gained protection from other advisors who attempted to poach my clients and were not prepared for questions about their personal compensation.

But, most of all, I gained confidence stopped squirming about fees.

Will You Do It?

I believe with every fiber of my being that there are clients who want to work with advisors who charge every kind of fee there is. Clients are as varied as we are.

If we are going to be criticized by personal finance creators, let it be based on the advice we give to our clients and not because we haven’t fully disclosed the entire fee structure.

Thanks for reading. If you found this interesting or helpful, I hope you’ll pass it along to someone who might not be a subscriber.

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