Welcome to Financial Advisor IQ

Advisors Must Overcome Their Shyness About Fees

By Thomas Coyle April 15, 2013

A lot of wealth managers hate talking about getting paid, especially to clients and prospects. In fact, this reluctance “is the norm with advisors,” according to James Grubman, a psychologist in Turners Falls, Mass., who helps advisors work more effectively with their high-net-worth customers.

It’s an understandable foible. Many of us feel diffident about discussing our own compensation. But for advisors, shyness about fees can cause misunderstandings that may drive clients away.

More so now than ever, says Grubman. In the wake of the financial crisis, many clients need reassurance that every dollar is well spent. So it’s O.K. to say you’re in business to make a profit — provided you put it in the context of a fully disclosed and fair exchange for specific benefits.

Richard Brown, head of JBNA Financial Advisors in Minneapolis, sees conversations about fees as a chance to explain to clients that his charges cover services that go well beyond portfolio performance. “Advisors who worry about fee compression are the ones who just manage the money,” he says. “They’re open to challenges in a bad year.”

By contrast, he says, his practice, which has about $480 million under management, also builds financial plans that mesh with clients’ lives and keep them from making hasty investment decisions. Emphasizing this “value add” from planning makes Brown feel secure enough about fees to discuss them openly.

A simple fee structure makes the conversation simpler. JBNA charges 100 basis points for portfolios between $1 million and $3 million, and 125 to 150 basis points for significantly smaller ones. For portfolios over $5 million, fees are negotiable. This structure, says Brown, “is easy to follow, and it works.” The complicated payment grids that some advisors use, he adds, baffle most civilians.

The “Bouncer” Effect

Being upfront about fees can help weed out unsuitable prospects, according to Frank Armstrong, president of Investor Solutions, a Miami-based firm with around $625 million under management that specializes in portfolio construction and oversight.

“There are investors who refuse to pay any fee, no matter what they get for it, and delegators who understand they have to pay to get the value we can add,” Armstrong says. Between those extremes are clients who are willing to pay — but not necessarily the 40 to 100 basis points that Investor Solutions charges, depending on the size of the portfolio. Tackling the topic of fees early helps Armstrong and his colleagues get a sense for which prospects are worth courting.

“You don’t want to spend months doing a proposal for someone who doesn’t want to pay you,” says Armstrong.

Who should bring up the topic? Grubman thinks the wealth manager should take the lead. Many clients are as loath to discuss fees as their advisors. If someone doesn’t take charge, a neurotic standoff can develop, ultimately alienating prospects and leaving existing clients wondering if they’re really getting value for their money.

Among Grubman’s other tips for making fees palatable: find out what peers charge by looking up their ADV Part II forms — or call up competitors pretending to be a prospect — so that you can show that your compensation is in line with that of other advisors who offer similar services. Then put your pricing policies and rationale in writing so prospects can mull it all over at their leisure.

Above all, Grubman urges advisors to practice their fee spiel until they’ve got it down cold. “Rehearse it in front of your wife, friends, your business partner — anyone who will listen, even the mirror,” he says. “It’s too important to leave to chance.”