How to Explain 6 Common Fees to Clients

“So, what’s this going to cost me? I bet it’s a lot.”

It’s imperative to fully disclose fees and commissions with clients. However, it can be an awkward discussion. Let’s look at a few strategies.

Background

It’s human nature to want to get as much as possible while paying the least amount possible.  If you have any doubts, visit a buffet restaurant sometime.  Some people think “no load” means “free,” implying that particular investment firm is run by an order of unpaid monks that works without compensation. A better description of “no load” is that one less person is being paid.  Everyone else involved with the investment is still making something.

Some advisors and agents feel the client understands “no one works for free” and fees of some sort are built in. Others might rely on a “don’t ask, don’t tell” logic. If they don’t bring it up, I won’t bring it up. However, the firm will send documentation. Your competitors will ask your client, who is now their prospect: “Do you know how much you are paying? Let me tell you…”  How would you like the client to find out this information?  Better if you have control.

Six Ways to Explain Fees

Clients want to know what they are paying, yet they may feel awkward about asking.  When I was an advisor, I would start that conversation with: “It’s important you understand how we make money…”

1. Stock commissions. It’s a fee on top of the purchase price, very similar to sales tax in a store. If you buy an item for $ 100 and state sales tax is 8%, you pay $108 in total. You pay a commission when you buy and again when you sell.

2. Markups on bonds. It’s similar to the difference between wholesale and retail pricing. When you go to the store and buy milk, you pay the posted price and that’s it. You know the supermarket is making money. They buy it in at wholesale, mark it up and sell at retail. Bonds work the same way. This bond is costing you (X). If you decided to sell it tomorrow and prices didn’t change, you would probably get (Y) for it.

3. Declining surrender charges. The investment the client is considering is meant to be a long term investment. If bonds are involved, the firm issuing the product is likely buying bonds with a longer maturity to get a higher yield. The longer the maturity, the greater the potential for price fluctuation. To encourage the client to stay in for the long term, the product has a surrender charge that gradually declines over time. (In addition, the agent or advisor’s compensation is often gradually deducted over time, even though it’s often paid up front. The surrender charge helps the firm recover that expense.)

4. Upfront sales charges. Far less common than they used to be because fee-based accounts often use institutional shares with virtually no sales charges. If there are upfront sales charges, they are meant to align with the client’s long-term investment objective. The fee is based on assets invested with the firm. As the client adds more money and crosses thresholds, future investments are charged a lower percentage sales charge.