5 Common-Sense Ways to Explain Fees to Clients

Related: 10 Reasons You’re Worth Your Fees

People do not like to pay for stuff. In a perfect world, everything would be free.

The internet has reinforced this idea. Information you get online comes with a cost. When you visit a website and read an article, banner ads appear. Look for something else and they follow you. Visit another site and annoying popup boxes appear.

Free advice is often biased advice, designed to sell a product. Good financial advisors provide great value to their clients, but advice comes at a cost. How do you explain it?

There are many ways to explain fees. In the gallery above are a few suggestions. It’s important to deliver value in the relationship. Clients put a price on the value you deliver. It’s often higher than what you charge.

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,” is available on Amazon.

1. Pay as you go.

Asset-based pricing is utilized in fee-based accounts and managed money. The client is not being charged on a transactional basis, paying an annual percentage fee instead. A percentage figure (1%) can upset some clients. Express it in dollars (1% on $500,000 is $5,000 annually) and they can get really upset.

Explanation: The fee is applied on a “pay as you go basis.” You are only paying for the time you are in the program. If you use the service for 5 years, 11 months and 3 days, then leave, you are only charged for the time the program was in use. (Investing should be approached on a long-term basis.)

Rationale: There is no front-end charge or back-end load that needs to be amortized. You have flexibility.

(Image: Shutterstock)

2. Buying milk vs. buying wine.

Some business is still done on a transactional basis. Clients like to have fees spelled out in advance. I would often start with: “You should understand how we make money…”

Explanation: Buying bonds is like buying milk at the supermarket. You pay the posted price at the register. That’s it. Like milk, bonds are bought at wholesale, marked up and sold at retail. The store might not tack anything on and there is no tax, but you know the store is making money. Buying stocks is like buying wine. At the register, you pay the posted price plus sales tax on the wine. The commission paid to the brokerage firm is similar to how sales tax is applied.

Rationale: Everyone buys groceries. They know some items are taxed and others are not. They get it.

(Image: Adobe Stock)

3. It’s not free to live in the U.S.

You pay federal income tax, state income tax, property tax, school tax and sales tax. Are people happy about paying taxes? No. Do you know anyone who has said: “I’ve had it! I’m moving to a no-load country?” No. Why? Because they feel the lifestyle and opportunities they get are worth the cost to live in the U.S.

Explanation: Ask how much sales tax is in that state. It might be 6% or more. Ask about their income tax rate. It might be 24%. Is it a one time charge? Welcome to (state). Pay us 24% once and we will leave you alone. No, it’s a recurring charge. Now you can mention your fees, which seem low in comparison.

Rationale: You are equating taxes to an ongoing sales load to live in the U.S. People pay because they are getting value.

(Image: Shutterstock)

4. ATM fees.

Ask what it costs to withdraw $100 from an ATM that isn’t owned by your bank. It might be $3. That’s 3%! Your annual fee is likely closer to 1%.

Explanation: You paid 3% to withdraw $100. Will that ATM give you a year’s worth of service going forward? No! It thinks it did a fine job handing you your $100 and earned it’s $3 fee. You charge less and provide ongoing service for the year.

Rationale: We forget about ATM fees because we enjoy the convenience. We forget how high they are. They are basically a transaction fee. You charge less and provide ongoing attention.

(Image: Shutterstock)

5. Fees across everything.

Some clients might pick one aspect of the relationship (managed money) and complain about fees. There are other aspects to the relationship where you provide advice. Fixed income and cash might have little or no fees because they are held in separate accounts. You advise on those investments, too.

Explanation: Total up the fees paid on an annual basis. Divide by the value of the combined accounts. The fee percentage is often considerably lower. Make the point you advise on everything they own at your firm.

Rationale: Clients often forget you advise across their entire portfolio, including assets where they aren’t paying annual fees. They want everything to get attention.

(Image: Shutterstock)

5 Common-Sense Ways to Explain Fees to Clients

Related: 10 Reasons You’re Worth Your Fees

Bryce Sanders

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3. It’s not free to live in the U.S.

4. ATM fees.

5. Fees across everything.

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5 Common-Sense Ways to Explain Fees to Clients

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Related: 10 Reasons You’re Worth Your Fees

More on this topic

1. Pay as you go.

2. Buying milk vs. buying wine.

3. It’s not free to live in the U.S.

4. ATM fees.

5. Fees across everything.

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