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Practice Management > Compensation and Fees

Fees and Fiduciary: Good Business, Bad Marketing, Pt. 1

By Michael E. Kitces

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As the financial planning profession continues its inexorable march towards a fiduciary client-centric standard of care that minimizes or outright avoids conflicts of interest, those most passionate about carrying the torch have often been the most vocal in promoting those standards within their own businesses.

Yet recent research shows that from the consumer’s perspective, “fiduciary” is confusing and the word “fees” evokes an outright negative response; the special meanings we attach to those words inside our industry have translated poorly to the general public.

The key, then, is to figure out how to operate in the interests of clients, while communicating a message that is less about the battles being fought inside the industry and more about how the client benefits. Otherwise, while it’s true that those firms doing the best job of truly serving clients may be rewarded with the most referrals, they may not be able to convert those referrals to clients and grow their businesses if they have dug themselves a hole they can’t climb out of by using consumer-unfriendly terminology in the first place.

The inspiration for today’s blog post is the highlights of a recent study by the brand engagement firm Sullivan and the market research consultancy Northstar Research Partners entitled “Rebuilding Investor Trust” that attempted to answer the question “What Do Today’s Affluent Investors Really Want?” The study, which has been repeated for several years, looks at trends in trust with advisors.

As a part of the study, Sullivan/Northstar also examined general investor reactions to a wide array of terms commonly used by financial advisors, evaluating which were viewed positively, which were negative, and which were confusing. The surprising results? Some of the words advisors use most commonly to inspire trust, like “fee-based” or “fiduciary” are actually some of the most negative and confusing words in the advisor’s lexicon, from the perspective of the client.

The Sullivan/Northstar Results On Fees

Surprisingly, “fee-based” was actually one of the terms that generated the most negative reaction from investors, with a whopping 64% of those surveyed expressing a negative reaction to the phrase. The only thing worse was the word “fluctuating” and by contrast, only 35% reacted negatively to “Whole Life” and only 32% to “Short Term.”

And lest one read too far into this—assuming that consumers were making some finely sliced distinction between “fee-based” and “fee-only” as NAPFA does—showing up in the list of the top ten positive phrases was “No fee,” with a 93% positive response rate. The remarkably simple message: consumers hate fees, and it casts a negative shadow on pretty much anything associated with them. In point of fact, this shouldn’t really be surprising. Outside of our industry’s own “inside baseball” perspective on conflicts of compensation, the general public really does dislike fees. After all, how many people ever talk favorably about airline baggage fees, or cell phone activation fees? Would anyone really like airlines more if they advertised themselves as “fee-only transportation services”? Would we value the utility company more if it billed us a separate fee every time an electric line was repaired in our neighborhood, so that we would “properly understand the value that the utility company was delivering and ensure their business was appropriately compensated for each and every hour of work that was done on our behalf?”

Of course not. In fact, the evidence from other industries is quite clear: attaching fees, especially standalone fees, is a way to discourage utilization of the service. In other words, as discussed previously on my blog, charging separate fees for financial planning is actually a fantastic way to reduce the likelihood anyone buys financial planning services.

Simply put, while talking about fees within our industry has one meaning, the reality is that it’s industry jargon that most consumers don’t understand. From the consumer’s perspective, the conclusion is actually the opposite: fees are bad, associated with negative things, and stuff with fees is stuff to be avoided unless you absolutely have to pay for it (and then usually resented if you do have to pay for it).

In the second part of the post, we’ll look at the Northstar/Sullivan results on fiduciary, as well as whether or not a focus on fees and fiduciary is bad marketing.

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