4 Tips on Being Upfront About Fees with Clients

Discussing—and justifying—the fees that a financial advisor charges can be one of the hardest discussions that advisors have with their clients. This is because advisors often fail to draw clear connections between the fees that they charge and the real value of the services that they provide.

Advisors should be proactive in this discussion so that clients know exactly what they are paying and what they are getting in return. Here are some pointers that advisors can use to minimize misunderstandings and maintain smooth relationships with their clientele. (For more, see: Advisors: How and Why to Justify Your Fees.)

A Glaring Need to Understand Fees

A recent study conducted by J.D. Power Research indicated that just over half of all financial planning clients who responded to the survey said that they do not have a clear picture of the fees that they are paying to their advisor. This is a discussion that is best had in person, where the advisor can explain costs and fees face-to-face. This allows the advisor to answer questions and address issues that might otherwise never be raised, and it also gives the client the best chance of understanding how the advisor’s fee structure works.

The J.D. Power study showed that statistically, three times as many clients (54%) said that they felt like they completely understood the fees that they were paying compared to 18% who didn’t. The gap was even larger for affluent clients—this finding is important because the study also revealed that clients who clearly understand the fees that they are paying are more likely to refer others to the advisor than those who don’t. Advisors can therefore increase their referral base with a clear explanation of their fee structure to their clients who may not understand it. Here are some tips on how they can best do this: (For related reading, see: Paying Your Advisor: Fees or Commissions?)

  • Be consistent and clear: Advisors should lay out their fee structure up front so that there can be no misunderstandings later. However, they should begin by describing exactly how they will provide value to their customers through the services that they offer. Then these services can be linked to their fees so that the client will see exactly what they are paying for and why. Advisors who proactively initiate this conversation can show transparency to the client and have more opportunity to guide the conversation in the appropriate direction. This can also start a continual dialog between the advisor and the client that can foster greater retention and customer satisfaction.
  • Make sure they understand: Advisors should spell out their fee structure using layman terminology in order to maximize client comprehension. They can also ask questions at the end of the discussion to see whether the client has understood what was presented. Written materials can also be provided to help clients remember the specifics from the discussion. The level of detail in the discussion and materials provided should vary according to the client’s level of financial literacy. Advisors need to closely assess how knowledgeable their clients are in this area and tailor their meetings and discussions accordingly. It is a good idea to have the client repeat the fees and services at the end of the discussion in order to help them internalize the plan and cement the details in their minds.
  • Protect the client’s value: One of the biggest jobs that advisors have is helping clients to think and act rationally during periods of turbulence and market downturns. Advisors need to clearly quantify how the advice that they give benefits their clients. They can do this by showing how their current portfolios are likely to behave over the long term as opposed to what they are doing right now. Keeping clients on track when the going gets tough is usually the largest area of value that advisors can provide. (For related reading, see: How to Keep Your Clients During a Downturn.)
  • Keep the lines of communication open: As mentioned previously, advisors should maintain an ongoing dialogue with their customers to make sure that they stay on the same page about fees, services provided and other issues. This will show clients that the advisor is still attuned to their needs and is listening to their feedback. It can also help advisors to see how well they are communicating with their clients, especially in the initial meetings where fees are discussed.

The Bottom Line

Advisors who take the time to thoroughly discuss fees with their clients can save themselves headaches and misunderstandings down the road. An initial meeting that clearly delineates the fees, services and ultimate value that the advisor can bring to the table will go a long way towards maintaining lasting client satisfaction and obtaining referrals. This is especially true for affluent clients, who will usually refer more clients like themselves to an advisor who keeps a happy client base. (For related reading, see: Fee-Only Financial Advisors: What You Need to Know.)

This article was originally published at Investopedia.com.