by Ryan W. Smith
Nearly all successful relationships are built on trust and time. It takes time to establish trust but once proven, trust becomes bedrock in a lasting relationship. A client-based relationship, like the one between financial advisor and investor, is no different. In a report published by State Street Global Advisors and Knowledge @ Wharton, part of the Wharton School at the University of Pennsylvania, the advisor-investor relationship was looked at closely.
This is the second in a series about successful investor-advisor relationships, looking at State Street and @ Wharton’s report along with other relevant information to examine the many aspects of building and maintaining client relationships as the foundation of a successful financial advisory practice.
There is one topic that research has consistently shown to promote trust in an investor-adviser relationship quicker than practically anything else: clearly explained advisory fees. The State Street and @ Wharton research report showed that fee clarity along with excellent customer service are the pillars upon which most successful advisor-investor relationships are built.
It has been well-documented that the financial services industry has not done a good job of presenting fees to clients in the past. Online trading, wire services and some larger brokers have made strides in opening up the transparency of fee structures to their clients, but industry-wide fees are still mostly opaque. State Street and Wharton’s research showed that 95% of advisors claimed to have discussed fees with their clients while only 66% of investors interviewed for the report said their advisors had initiated a discussion regarding fees. Additionally, 20% of clients only spoke about fees with their advisors when an issue arose, a number nearly matched by 18% of advisors who said the same.
Clearly, there is still much room for improvement. Here are four ways that State Street and @ Wharton found that successful advisors were dealing with fees in a way that continued to build client trust:
1) Disclose transparently
The researchers found, in some of their longer interviews with advisor respondents, that clearly-explained fees, not fee amounts, are the most important piece of knowledge to investors use when choosing an advisor. Some of the advisor respondents also said they disclosed any potential conflicts of interest during the same conversation as a way show sincerity and transparency.
Respondents were consistent, the report shows, in saying that the most successful client fee discussions eliminated any grey areas. The simpler the structure, the happier clients appeared to be. The report detailed one scenario where a client asked an advisor for a lower fee. The advisor said that was okay but that the client would have to accept being lower on the advisor’s call list. The advisor said that ultimately the client happily requested the higher fee.
Advisors who are uncomfortable talking about fees will often get very detailed in fee discussions with clients, listing exceptions, potential modifications and ranges of fees charged to different kinds of clients. This is a mistake, according to the report’s analysis. One advisor told the researchers about a 15-level fee structure at her broker-dealer in years past, which intimidated nearly all advisors at the firm. In recent years, she said, that structure was replaced with a single sliding scale to great success.
2) Disclose early
While explaining fees clearly and concisely as possible is important, timing is also an important component to fee discussions with investor clients. In their longer interviews with advisor respondents, State Street and @Wharton’s researchers reported that the most successful advisors almost universally felt that speaking about fee structures early in an investor-advisor relationship and as a matter of normal business practices was integral to building successful relationships.
The researchers also found high net-wealth investors discussed fees earlier and in more detail than for lower net-worth investors. However, this was not due to the differences in wealth, but the expectations of the investors themselves. Many advisor respondents said that the high net-worth individuals were more assertive, that those investors wanted to get the conversation out of the way themselves and move on to the business at hand. Those successful advisors, the researchers learned, then tried to apply some of these same methods to their entire client base and were surprised by the positive results.
3) Disclose context
Giving clients a reliable and easy to understand benchmark to compare a fee structure with is also important in making sure that discussing fees with clients runs smoothly. State Street and @ Wharton found that while advisors are often aware of related industry fee structures, most investors don’t know if a fee is too high, too low, a good value or a poor choice because they have nothing to compare the number to, except maybe a competing advisor’s information if they have already been shopping.
The reason for this, the report says, is that most people, especially high-wealth investors, are secretive about their financial investments. Typically only their advisor knows anything about their investments, as several advisor respondents noted: the topic is not one for the water cooler. This common trepidation speaks to the difficulty in building trust between investors and advisors in general.
The researchers found that successful advisors had a way to show their fee structure in comparison to something else, a benchmark so to speak, so that investors would be able to properly gauge the fee structure and make a sound decision. Some advisors mentioned to the researchers that they provided a chart showing their structure versus some industry competitors, which allowed them a way to start a conversation about the difference in service levels between the firms. Other advisor respondents told the researchers that they provided a cost range, for example a yearly range of .75% (75 basis points) and 1.5% (150 basis points), so that if a client was charged 1.25% (125 basis points) the client knew where they stood, allowing the advisor to explain why they felt the charge should be at that level.
4) Disclose in writing
The final aspect of discussing fees with clients in a way that builds trust is to disclose all relevant facts in writing. There are many studies across a multitude of disciplines that show that what someone hears is not necessarily what they remember. Therefore, the report says, successful advisors put everything in writing. This avoids any misperceptions that can later break down trust.
The report showed that successful advisors all said the same things, according to the researchers: disclose fees early in the relationship in a clear and concise manner showing context and putting everything into writing then ask for any questions. This, more than virtually anything else, will both establish trust early on in a professional relationship and allow trust to help the relationship grow more stable in a shorter period of time.