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Why only 14% of RIAs volunteer complete pricing information to clients and why selective fee disclosure is not a winning strategy

News flash! Clients don't care what goes in your pocket as long as they know the fees you charge are competitive

Thursday, June 27, 2013 – 4:05 AM by Guest Columnist Jack Waymire
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Jack Waymire: Only 26.3% of investors said they selected the low-cost service provider while 66.3% said they selected the advisors they trusted the most.

Brooke’s Note: Jack Nicholson made the phrase famous in “A Few Good Men” but on some level we all live by the words “You can’t handle the truth”. What better reason to tell white lies, untruths or — that tried-and-true go-to — simply not bringing certain things up? Kids have long used that strategy when dealing with their parents. Many advisors are no better than kids in this regard. Why bring up all those layers of expense you charge that include not only what you charge but that TAMP you use and, oh yeah, the fees that the mutual funds use inside the TAMP? Why have that thorny discussion when it needn’t happen at all, especially with old Mrs. Jones? Well, here Jack Waymire takes on Jack Nicholson and gives good reasons why clients can handle the truth and a little about what can be done to make fee facts more palatable.

Advisors need to do a much better job educating investors about their compensation, the cost of their investment recommendations, and the value investors receive for their money when dealing with an investment advisor.

Here’s how we know: A recent survey conducted by our firm, Paladin Advisor Research & Registry, of 100 RIAs and IARs found that a mere 14% voluntarily discussed their method of compensation when marketing financial advice and services to investors, and a majority said they tried to minimize discussion about these topics. See: How RIAs can maximize their web marketing with nary a 'friend-ing’ or tweet.

In fact, a lot of advisors are so concerned about what they make that they withhold total expenses from investors, thereby increasing confusion and reducing their credibility.

It’s the advisor, not the fees

When we asked 421 investors about advisor compensation, a whopping 80.7% said they were “most concerned” about the various fees and commissions that were deducted from their accounts. An even higher percentage — 86.2% of those investors — said they were “very confused” by the array of expenses that were deducted from their accounts.

When dealing with multiple advisors, investor bewilderment only intensified: Only 18.8% said they were comfortable comparing the combined expenses of multiple advisors; there were too many different fees, bundled fees, sliding fee schedules, wrap fees, types of commissions, and a variety of minimum fees.

By contrast, only 47.3% of investors said they were “concerned” about the percentage of the combined expenses that was paid to advisors.

But here is perhaps the most surprising result of our survey: When multiple advisors proposed various combinations of investment expenses, only 26.3% of investors said they selected the low-cost service provider and 66.3% said they selected the advisors they trusted the most.

The bottom line is that a lot of advisors are so concerned about what they make that they withhold total expenses from investors, thereby increasing confusion and reducing their credibility. They are missing the forest for the trees: The majority of investors do not care how much advisors make as long as the total expenses deducted from their accounts are reasonable. See: Morningstar gives advisors a glimpse of fees RIAs are charging clients using PriceMetrix data.

Having 'the conversation’

Consequently, a key marketing tactic in differentiating yourself from brokers and from other RIAs is to create trust that tips the scale in your favor by doing what your competitors are not willing to do — provide complete, accurate information about expenses and how you are compensated.

It can start with giving prospective clients five reasons why they are better off paying fees for your financial knowledge, advice and services. In doing so, you will be educating them about the appropriate way to pay for financial advice, your expenses and why they should trust you, all at the same time. See: What exactly is an RIA?.

1. Why select a financial fiduciary?

You are an RIA or an IAR. These registrations permit you to provide financial advice and ongoing services for fees. This is the foundation of your business model. The frosting on this particular cake is that RIAs and IARs are financial fiduciaries. Consequently, you are held to the highest ethical standards in the financial services industry.

The combination of ongoing advice, highest ethical standards and fee for service is a very compelling package — but not one that investors will necessarily grasp on their own. See: Veteran Merrill Lynch manager leaves seven registrations on the table to return to his pure-RIA roots.

2. What services do you provide?

Investors should know exactly what they get when they pay you. For example, they pay a fixed or hourly fee for a financial plan. Or, you wrap the planning expense into your asset-based fee. Make sure you describe all of the services that the investors receive for the monies that are deducted from their accounts: planning, investment advisory services, money management, custody and transactions. By fully disclosing fees and expenses, you are building a solid foundation for a lasting relationship.

3. The link between continuous services and continuous expenses

Investors do not need one-time services; they need continuous advice and services that help them achieve their long-term financial goals. These services can be divided into two categories: investment advice and servicing (meetings and reports). Continuous investment services include: strategy, asset allocation, manager selection and risk management. Servicing includes: performance reports, quarterly meetings, brokerage statements and investment outlooks. These services and reports justify the payment of a continuous advisory fee. Only RIAs and IARs are allowed to provide continuous advice and services. This is a major education opportunity: Only 18.3% of investors we surveyed made the connection between continuous services and specific continuous expenses.

4. The case for asset-based fees

There are four compelling arguments for asset-based fees.

1, Commissions are paid to advisors at the time of the sale and before any services are provided to investors. Let’s call it “paid in advance.” Fees, on the other hand, are paid at the beginning or end of each quarter, so it is “pay as you go.” Advisors who are paid in advance have no economic incentive to provide ongoing advice and services. See: How the new 12b(1) fee restrictions could transform the financial advisory industry.

2. Your fee goes up and down with the market value of investor assets. Your clients’ assets must increase in value for you to make more money — not counting reinvested income and contributions. You, therefore, have a major economic incentive to increase the market value of your clients’ assets. See: The SEC needs to clean up its semantics before accusing RIAs of inflating AUM.

3. Then there is the 99:1 ratio. If your fee is 1% and the market value of your client’s assets increases by $100,000, your client makes $99,000 and you make $1,000. This division of market appreciation creates perspective for your 1% fee.

4. Your compensation stops if your results do not meet investor expectations (performance, risk management, servicing). This is a compelling argument for why investors should pay fees. Advisors who are paid in advance have no consequences for failure to meet the expectations that they created during the sales process.

5. Conflicts of interest: Why you work for the client

A lot of advisors we work with tell investors “Professionals who work for fees have fewer conflicts of interest”. But, they do not take the extra and crucial step of explaining exactly what those potential conflicts of interest are. As an example, advisors who are paid by investors work for investors. Advisors who are paid by third parties (broker-dealers, mutual fund companies) work for themselves or the third parties.

Three additional points drive this point home for investors:

1. You are required to put the interests of investors (e.g., achieving their goals) ahead of your interests (producing revenue).

2. Your advice does not affect your compensation.

3. Finally, the interests of third parties do not affect your advice the way, for example, a B-D that holds securities licenses may influence or control advisor recommendations.

Jack Waymire spent 28 years in the financial services industry. For 21 of those years he was the president of an RIA that provided advice and services to more than 50,000 individual and institutional investors. He is the founder of Paladin Registry (https://www.paladinregistry.com/for-advisor/about-us) that provides free tools and information to investors who use the services of financial advisors.

Mentioned in this article:

Paladin Digital Marketing
Consulting Firm, Marketing & Public Relations, Investor Referrals
Top Executive: Jack Waymire

Mike McDaniel

Mike McDaniel

July 2, 2013 — 11:07 PM

Transparency is paramount. The same relationship when I analyze money managers. I only complain about mutual fund fees when performance does not justify the expense, same with our clients.

Frederick Van Den Abbeel / TradePMR

Frederick Van Den Abbeel / TradePMR

June 27, 2013 — 11:58 PM

Mr. Bob Veres recently published a wonderful article on this subject titled “Six Reasons You’re Charging the Wrong Fees” — I found the article particularly informative.


Brooke Southall

Brooke Southall

June 27, 2013 — 8:53 PM

I think you make an important point — that the divulging of prices in this industry follows a script not unlike what happens at the car dealership. I get why it happens in a moon-roofing world but it hardly seems ideal.


Brooke Southall

Brooke Southall

June 27, 2013 — 8:08 PM


So what do you tell prospective clients when they ask you what your fees are? Or does it just never come up in conversation?


Elmer Rich III

Elmer Rich III

July 7, 2013 — 6:10 PM

More from PWC report:

“Traditional approaches to product and service provision are changing.
The emphasis is now on solutions and a shift away from perceived commoditised products to advice. The shift to open architecture will continue and organizations are now focused on rationalization and more specialist products. Greater transparency in pricing and the abolition of retrocessions in some countries is leading to margin pressure. The industry value chain is evolving with greater specialisation and focus on the key determinants of success. As a result, new and innovative competitors today compete alongside traditional industry players.

Understanding the client’s perspective of value is only getting tougher.
Respondents need to understand their clients better. While respondents are clear that many aspects of their client relationships are effective, key demographic trends, (including the rise in importance of Generation Y and of women as specific client segments), now need to be embedded within segmentation techniques, next generation transition management needs to improve and profitability measurement needs to become more sophisticated. Respondents rank themselves as needing to improve in some key areas of client value added, especially in client reporting, digital offerings and provision of broad based advice. The industry needs to become smarter at understanding what clients really value, and in turn how much they will pay for the value added. Private clients tell us that they are currently underwhelmed by how they are communicated with by their wealth managers.”

Brooke Southall

Brooke Southall

July 3, 2013 — 8:27 PM

I’d say an average sedan costs $24,000 and the average Bay area house costs about $750,000.

What’s so hard about that?

Elmer Rich III

Elmer Rich III

June 27, 2013 — 8:39 PM

After the facts are known, a fee for each case is calculated and shared privately. Of course, the client can do what they want with that information. If the facts change, which they always do, the fees change.

Fees are invariably identical, however. If they were not, it would be an early red flag. Pricing is effectively uniform and standardized for basic financial services.

Full disclosure and transparency applies to client information accessibility – not publishing to the general public.

Factually, also, how would an accurate or even representative figure ever be calculated? Theoretically, it may be possible to send out identical fact scenarios and then ask every firm to supply a set of fees – but that would be unworkable. It’s like asking – what is the price of a car?

More demand for customization of services leads to more flexibility in fees. So the point may be moot.

Elmer Rich III

Elmer Rich III

July 3, 2013 — 9:48 PM

Then there is this – so the fee will be based on the client’s feelings not what the services cost/value/etc. !?

“It’s all about relationships. According to PriceWaterhouse Coopers’ 2013 wealth management survey, the traditional pay structure where a fee is tied to assets under management may shift to a more client-centric “reward and incentive structures” model.

“Historically the focus was on net new money but we’re seeing a shift to the client experience, the client’s goals and managing risk,” PwC’s Steven Crosby told Financial-Planning. He said firms are starting to judge wealth managers’ performance based on customer satisfaction.”

Managing money, or other professional services, based on emotions was determined to be a failing strategy centuries ago. BTW, research says patients who “like” their doctors more have worse health outcomes, die earlier, more symptoms, etc.

Brooke Southall

Brooke Southall

July 3, 2013 — 7:42 PM

What I really appreciate as a consumer is when somebody says: We have a complex pricing formula but in the case that you buy an ABC package, it would cost you about XYZ.

I just bought a Toyota at a dealership and that’s how they approached it. I liked it. It gave me my bearings.

When somebody tells me they can’t give me any numbers because it’ll confuse me, I am insulted and inconvenienced.

Elmer Rich III

Elmer Rich III

June 27, 2013 — 10:17 PM

Right. Hard to imagine how it could be standardized or even reported accurately. Yet, there is increasing research that fees are critical to returns, especially on folks life savings and retirement plan accounts.

Not sure how the problem could even be researched. Ideas welcome.

Elmer Rich III

Elmer Rich III

July 3, 2013 — 8:09 PM

Right, but is the problem with specific fees for a scenarios when the facts are known or for general public statements about fees, or typical fees?

Again, what does a “car” cost? Or house?

Elmer Rich III

Elmer Rich III

July 3, 2013 — 8:43 PM

As soon as you start getting specific, at all those numbers change. As the time frame changes so does the fee, e.g., sample size issues.

What then is the error term from the average to specific applications? How many standard deviations?

What kinds of “decision” need to be made from the data point? A law of nature is that “information is expensive” So data that delivers real “information” and is predictive and accurate is expensive to create, find, etc. Same with advisor fees.

Elmer Rich III

Elmer Rich III

July 3, 2013 — 7:13 PM

Right, but how is that, very general principal, implemented? It soon becomes multi-dimensional.

Accuracy also seems important but then we have to admit there are multiple scenarios and how are any of them chosen and then generalized? Ideas welcome.

Elmer Rich III

Elmer Rich III

June 27, 2013 — 7:46 PM

What is the advantage, for any business especially a professional services firm, in publicly disclosing anything to do with firm finances? Since all fees are specific to individual cases – what numbers could even be accurately reported?

Of course, competitors will use this data but it is likely it will be of little value in attracting new business.

Elmer Rich III

Elmer Rich III

June 28, 2013 — 3:03 PM

We are business development consultants and the problems we see for our clients which include RIAs, TPAs and family offices include:

- Sales pressure forces lower common fee

- Scope creep and increasing service demands

- Inability to charge for additional services and expenses

- Increasing tech demands and costs, again that cannot be shared with clients

- Very little costs accounting

Thus, many firms and family offices end up stuck in a “wasting” economic model where the more they grow and deliver the less money there is available to support the service delivery, business continuity and building of equity. We do M&A work as well.

Where we are allowed to have some pricing input, we find clients are uniformly supportive of paying what the service costs and is worth, often more. But there is a strong psychological resistance to setting fees in a business-like manner. Usually it is reactive and ad hoc.

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