Fees have become a hot topic with increased transparency and pressure from low-cost digital advice platforms. However some advisors are still not adequately prepared and fear the fee discussion with their clients.
Fees have become a hot topic with increased transparency and pressure from low-cost digital advice platforms. However some advisors are still not adequately prepared and fear the fee discussion with their clients. Instead of fearing this discussion and wishing it could be avoided, advisors can embrace this as an opportunity to define exactly what makes them unique, what services they provide, and how the added value they deliver not only justifies their fees but is actually a tremendous bargain for their clients.
When contemplating the advantages of a referral arrangement system where the advisor reaps tremendous benefits of efficiency by outsourcing all compliance and portfolio management responsibilities, a common fear that holds some back from engaging in this business model is their fear of the fee discussion. They feel as though it will be even more difficult to justify their fee when outsourcing “all” the work. It is somewhat surprising that many advisors believe their clients are with them solely based of their ability to pick stocks or mutual funds. While finding the right investments is a cornerstone of good advice, the reality is that there are many other responsibilities that are also crucial for justifying fees.
Delivering more services than solely investment management can help advisors justify what they charge. In fact, the marketplace has already proven this as the traditional “stock broker” seems to be going the way of the dodo. A study by Russell Investments indicates that financial planning services are typically worth an additional 4.04% return for a client with a $500,000 portfolio. They proposed the following breakdown for the added value of a planner: coaching and influencing investor behavior adds 2.00%; annual rebalancing adds 0.20%; basic investment-only management adds 0.33%; planning with ancillary services adds another 0.75%; and tax awareness planning adds 0.80%. Clearly if investment advice adds an additional four percent to a client’s portfolio, it should be easy to justify a client’s fees.
The main reason your client is with you is because they like and trust you. You have cultivated a relationship with them that goes beyond your ability to pick the hottest stocks. You also give your clients peace of mind knowing that a professional is keeping track of their finances and making sure their money is invested wisely so that they can focus on other activities that add joy to their lives. Whether it is estate, insurance, tax or retirement planning, ensuring proper accounts from TFSA to RRSP, or budgeting and cash-flow management, the services you provide justifies your fees.
Perhaps the most impactful responsibility of an advisor involves guidance and coaching to protect a client from their own behavior and preventing them from making huge financial mistakes. This added value cannot be underestimated. Many people who consistently go to the gym use a personal trainer. Why do they pay someone when they know how to use the gym equipment? The fees are justified because of additional responsibilities like being a coach and motivator to stay on course.
Good story as an example to justify fees is the protective effect of a good planner. Recently a planner worked with a client for over twenty years, utilizing a slow and steady approach to help build their net worth to nearly a million dollars. Suddenly the media, through articles, commercials, and talking heads, increased the client’s awareness about investment fees and he grew more frustrated with his planner because he did not realize the value he was getting for those fees. His son made a lot of money doing his own investments so why was he wasting money for professional advice? He left his planner and on the recommendation of his son put all of his money in the latest investment trend. In this case it was cryptocurrencies. A few months later, that client came back to the planner and apologized for ever doubting the value of his services, wanting to work the planner again. The planner said no. The planner didn’t refuse out of spite but because their million dollar account had dwindled to a hundred thousand which was now below his minimum client size. Sometimes a planner’s most important job is to protect clients from themselves.
Turning an uncomfortable fee discussion into a marketing opportunity to explain your services and how you can add value will strengthen your relationships and protect your business. If you try to compete with others based on fees then inevitably you’ll be working for free because there’s always someone willing to go lower. A prospect who was persuaded by your value proposition shouldn’t have concerns about your fees. So embrace the fee discussion and run an efficient practice by outsourcing compliance and portfolio management responsibilities.