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Practice Management

Investors expect to pay a fee. Full disclosure is often more important than the fee itself.

This Practice Management article is intended for financial advisors only (registered representatives of broker dealers or associated persons of Registered Investment Advisors).
 

When my partner and I left a wirehouse to start our fee-only RIA [registered independent advisor] firm in 1994, we had to explain our advisory fees, which had previously been embedded in products. To our surprise, prospective clients didn't blink when we brought up the issue. We quickly became adept at explaining the fee in plain English, and then we took it a step further: We educated clients on all the fees—explicit and implicit—associated with any particular investment.

I came from the institutional side of the industry, and I understood how the large firms made money. This became a differentiator for us because we were teaching investors about industry practices—and in the process, showing that their current advisors often weren't disclosing all the ways their firms were profiting. Closing the sale became very easy, and we gained a great deal of trust due to our educational approach.

The lesson for us was that investors expect to pay a fee. Full disclosure is often more important than the fee itself, because investors don't like learning about fees after the fact.

We still see many retail investors who are unaware of the fees they pay. While advisors think clients come to them for portfolio management, several recent studies suggest advisors are not actually adding value through investment returns. (In aggregate, advisors' portfolio returns typically trail packaged products' returns, which in turn often trail benchmarks.)

Where advisors do add value to the investor experience, however, is by delivering outstanding service—and a frank fee discussion is just one way to differentiate yourself. We use the following process with our clients and advise our partner advisors to do the same:

  • Make fee discussion part of your first discovery meeting.
  • Have your prospective clients send you their current statements before the first meeting. This way you know how they're investing and you can research the fees they are paying.
  • Create a simple document that educates a prospect on explicit and implicit fees. In addition to expense ratios and advisor fees, explain custodial fees, transaction charges, trading commissions paid by the fund, bid-ask spreads, soft dollar arrangements, supplemental disclosure documents—whatever will affect the ultimate cost structure. Lay out all the fees the client will pay, and to whom.

Learning to confidently outline how you charge for your services—and why you are worth it—sends a strong message to clients that you are a capable advisor. Being defensive or evasive confirms much of what investors already think of our business—that we're hiding something. That's bad for all of us.


Patrick Sweeny is co-founder and principal of Symmetry Partners, an RIA in Glastonbury, Connecticut, that also works as a turnkey provider for other advisors.

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