Charles Schwab had
a great television commercial a couple of years ago that nicely captured the dilemma facing financial advisers when it comes to talking to their clients about fees. The commercial opens with a father and his young son who have just left a meeting with their financial adviser. “Hey Dad, who was that man?” the child asks.
“He's our broker; he helps look after all of our money,” the father explains.
This triggers a rapid-fire succession of questions from the boy: “Do you pay him? How much? What if you're not happy, does he have to pay you back? Why not?”
Not surprisingly, the father doesn't have any good answers to these questions. The ad is meant to be a call to action for investors to start asking these questions of their advisers and, ultimately, consider lower-cost, self-directed wealth management options like those offered by Charles Schwab. It may just as well be an admonishment to advisers, saying they really need to do a much better job of discussing their fee arrangements.
Good advisers don't just manage their clients' money. They help clients identify and balance financial goals, from retiring comfortably to leaving a financial legacy. All the while they educate clients, to help them make smart financial decisions, and provide a steady hand when markets are volatile and investors might otherwise make poor, emotionally-driven decisions. Yet for all they deliver,
many advisers fail to fully and effectively articulate their value proposition to their clients, or relate their services to the fees they charge in exchange.
(Related read: 5 simple ways to help clients understand advisory fees)
In fact, according to J.D. Power research, more than half of investors (56%) with a financial adviser don't fully understand the fees they pay. This is a big problem for advisers, because clients who completely understand their fees report 20% higher satisfaction with their adviser, irrespective of how much they pay. Greater satisfaction translates directly to greater loyalty, retention and — especially critical in this business —
more referrals.
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The upshot: Advisers shouldn't shy away from discussing fees with clients. Research strongly supports taking the time for a face-to-face discussion, in addition to other tactics, to provide greater fee transparency. This is in part because they provide an opportunity for the adviser to communicate value as well as cost, and give clients the chance to ask questions they might not otherwise. It's also just more effective. Clients who say their advisers have had this conversation with them are three times as likely as those who don't (54% versus 18%) to say they completely understand their fees.
DRIVING AFFLUENT REFERRALS
The trend is even more pronounced among more affluent investors ($1M+ investable assets) than among investors in general. This can be seen in data we've tracked looking at the impact of fees and commissions on likelihood to make a referral, which remains by far the largest and most important source of new business for advisers. Other than the relationship with the financial adviser, satisfaction with commissions and fees is the single largest driver for affluent investors referring friends and family to their financial adviser.
Relative Impact of Fee Satisfaction on Overall Satisfaction Vs. Advocacy (Likelihood to Recommend)
If advisers are going to increase transparency for clients, they first need to understand the key sources of confusion. Based on our research, the most common barriers to client understanding include: complexity, or a lack of understanding of the multiple layers of advisory fees, transaction fees and custodial fees they may be paying; jargon-laden documents that describe fee structures in an overly opaque manner; constantly changing fees; and a lack of alignment with services provided, such as a lack of a specific line item for financial planning or performance monitoring. Efforts to clarify these specific areas of adviser/client communications can be traced to meaningful improvements in overall customer satisfaction.
BEATING THE ROBOS
Having these conversations with clients will only become more critical for advisers as new lower cost options for investment management like robo-advisers
continue to gain awareness and adoption. Some investors — especially affluent millennials who are more receptive to technology-based solutions — will naturally begin to question whether the higher fees commanded by traditional advisers are really worth paying, especially if their advisers aren't providing much beyond basic portfolio management.
Also, firms like the aforementioned Charles Schwab, who are actively focused on challenging the traditional “full-service” establishment, are effectively raising investor awareness of fees through a steady series of television commercials and the introduction of
the Schwab accountability guarantee program.
Some advisers may wonder why they should spend scarce time they could use serving clients or winning new ones educating clients about fees. They also may be reluctant to start a conversation that could generate a negative client reaction. Fortunately, explaining fees to clients doesn't have to be scary.
Advisers can employ several straightforward strategies to educate and inform clients about the fees and the value they receive in return. Those who take a proactive approach may find that those efforts pay considerable dividends, helping to boost retention and opening pathways to increased referrals from clients. Those who don't may struggle to remain relevant.
Mike Foy is the director of wealth management at J.D. Power.
