How to deal with client pushback on pricing

With the explosion online trading platforms and ETFs, it’s highly likely that clients have grown used to low fee percentages that are far below the rates used by many financial advisors, particularly those that are paid based on assets managed. That means clients may question the fees they are charged — and advisors have to be ready with answers.

One possible approach is to look at three different categories the client’s assets may fall under: assets under management that are billed at an annual percentage rate; assets held at the firm bought via transactions, such as CDs and corporate bonds; and assets held away in employee stock purchase plans, private retirement plans, and deferred compensation plans.

“Total all the assets you are discussing when you present a periodic portfolio review,” said Perceptive Business Solutions President Bryce Sanders in a piece for ThinkAdvisor. “Next, calculate the overall fees they are paying” including fee-based accounts as well as any transaction costs on fixed income not held in a fee-based account. The percentage charged by an advisor, Sanders said, is likely far lower.

Another possible strategy is to unbundle assets. While most advisors would like to put all a client’s assets in fee-based accounts, the client might include large positions they will never sell, such as shares in a company they own or a blue-chip stock with a cost basis measured in pennies. Advisors can put those kinds of assets — as well as CDs and bonds they’ll most likely hold to maturity — in a transactional account.

“You have now separated the actively managed assets from the passively managed assets,” Sanders said. The arrangement leaves most of the activity in fee-based accounts, so clients can continue to be advised on everything without feeling they’re being taken advantage of.

Alternatively, advisors can agree to a lower pricing structure, somewhere on the order of 80%. The discount can be granted for a year or two with the understanding that it will be revisited down the road. Over that time, advisors have the chance to show their value in the relationship; for clients who go on to put much more assets in their advisors care, maintaining the discount may be appropriate.

Another common approach is to break down the fee into smaller chunks equivalent to a per-day charge. Clients paying 1% on $300,000 in assets under management may feel $3,000 a year is too much, but dividing that over 365 days and comparing it to a daily expense — their commuting cost, or a drink and pastry at an upscale coffee shop — would cast it in a more favourable light.

Finally, some clients may be apprehensive over the prospect of making a mistake and paying a lot to undo it. “Front-end load charges and surrender charges are what they fear,” Sanders said. But in most fee-based structures for assets under management, clients are only charged for the time they’re using the service. Clarifying that “pay-as-you-go” model with them can elicit a sigh of relief.

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