Question marks (Image: Thinkstock) (Image: Thinkstock)

“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.

5. Managed money (1). Asset-based pricing and fee-based accounts are the ultimate in “pay as you go pricing.” If you are invested with the manager for three years, two weeks and one day, then choose to leave, you are only charged for the amount of time you were using the service.  Obviously investing should be approached with a long-term timeframe in mind.

6. Managed money (2). Suppose the client has $500,000 invested and the annual fee is 1%. This means they are paying $5,000 a year assuming the portfolio value didn’t change. Obviously you hope the value goes up significantly. It sounds like a lot of money because it is a lot of money. However, that can also be expressed as $13.70 a day. That’s a little more palatable.

Discussing the Difference

The earlier background section implied some people equate “no load” with paying nothing.  They compare “paying nothing” with “paying something.” That’s a hard argument to win. Of course, the value you bring to the relationship is important, but here’s another way to approach it.

When choosing the no-load option, they aren’t paying nothing. They are paying something.  Working together with the client, find out that percentage. You have tools on your desktop terminal that will show sales, management, administrative and other charges built into virtually any fund share, by class of share. Get that number. Now compare it to your recommendation, which might be a professional money manager priced at 1% annually. Identify the difference between the two numbers. Now the conversation isn’t about paying nothing vs. paying something, it’s about the added value you get for the difference between the two numbers.

Discounting and Unbundling

Some clients wait until you name a price, then ask for a discount.  You may have the latitude to give them one. Sometimes they want too much.

Here’s how I heard an experienced New York advisor handles the problem. The advisor explains how he does business. He outlines what the client can expect in the relationship and the benefits the client receives. He explains pricing. The client counters with a discounted number.  The advisor says “fine.” He returns to the list of things the advisor plans to do for the client as part of the relationship. He looks them in eyes and says: “Which parts should we take off the table?”

Pricing must be discussed. Some ways are more tactful than others. You provide value. You are seeking a relationship, not a transaction.

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Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry.  His book, “Captivating the Wealthy Investor” can be found on Amazon.