Practice Management

3 Essential Charts to Improve Your Fee Discussions

Surveys reveal that while many Advisors discuss fees with clients, a perception gap continues to exist about the value of services provided. Drawing on compelling research, Kevin Prins, Managing Director, Head of ETFs and Managed Accounts, BMO Global Asset Management, suggests taking three simple steps to ensure clients fully grasp the depth and breadth – and value – of what you have to offer. This is all part of BMO Global Asset Management’s updated efforts to help Advisors and their clients with the “Price of Advice.” These points are part of larger presentation and are further supported by client-related materials that are available upon request.
September 2019

Kevin Prins

Managing Director, Head of Distribution, ETFs and Managed Accounts

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Surveys reveal that while many Advisors discuss fees with clients, a perception gap continues to exist about the value of services provided. Drawing on compelling research, Kevin Prins, Managing Director, Head of ETFs and Managed Accounts, BMO Global Asset Management, suggests taking three simple steps to ensure clients fully grasp the depth and breadth – and value – of what you have to offer. This is all part of BMO Global Asset Management’s updated efforts to help Advisors and their clients with the “Price of Advice.” These points are part of larger presentation and are further supported by client-related materials that are available upon request.
Take Inventory

Whether the client was onboarded yesterday or in years past, sometimes it helps to re-visit the account and see how it has evolved over time. Take inventory of the relationship – all while keeping an eye on the account statement to ensure fees correlate to the value created. If you think any points need customization or clarification during the meeting, mark them down in your CRM and add a reminder for the annual review. The goal is to personalize the conversation with salient details, rather than simply enumerate a rehearsed spiel on how fees are structured and tallied.

Without properly cataloging your value-add, clients may seem agreeable while still feeling insecure, intimidated and/or uncomfortable with what they are paying. Consider the chart below, which shows that despite becoming a more frequent topic of conversation, fees remain widely misunderstood by the investing public. Even when clients acknowledge that the Advisor touched on compensation – including commissions, MERs, and the dealer relationship – only 16% feel confident in their knowledge about where money is going.¹ Itemizing specific services (financial planning, estate and trust, insurance) for each client can help ground these abstractions into reality.

Chart 1) The Knowledge Gap Continues to Exist

Knowledge of Fees
2015 2016 2017
Advisor discussed compensation 53% 59% 59%
Advisor discussed fees/commission 58% 66% 70%
Advisor discussed MER 57% 59% 65%
Advisor discussed fees paid to firm 53% 53% 58%
Believe part of fees go to advisors (Definitely/Think so) 72% 70% 85%
Very confident in knowledge of fees paid
(rated 10 on a 10 point scale where 1 means not confident and 10 means very confident)
16% 19% 16%

Source: Canadian Mutual Fund Investor Survey, Pollara Strategic Insights, July 2018.

Marshall Your Facts

As a touchstone for your client conversations, remember that trust begins – and ends – with transparency. Most clients are looking for peace-of-mind on fees, meaning they want clarity on how your pricing model compares to industry standards. Give them the facts: according to PriceMetrix data, the average cost for fee-based Advisors ranges from 0.87% to 1.14%, and the average fee rate for households with $1 million to $1.5 million in managed assets is 1.06%.²

However, given that fee rates are inversely correlated with account size, clients with less than $1 million in assets should be informed that their bill may be a higher percentage than average. Likewise, clients with more than $1.5 million could have below average cost – though it’s important to convey that fees exist along a scale, and can be affected by numerous factors, including assets under management, the service model and even the phenomenon of householding assets.

Next, highlight all your services – in numbers. We believe that if you can quantify your impact, you can justify your price, which is why we’ve analyzed a cross-section of reports to identify critical areas where Advisors truly make a difference. Below is a brief summary of the findings:

Chart 2) Value of Service Provided

Behavioural Coaching 1.50%
Dynamic Withdrawal Strategies 0.50% to 0.70%
Systematic Rebalancing 0.35% to 0.44%
Application of Tax-Efficient Strategies 0.23% to 1.00%
Asset Allocation 0.28% to 0.82%
TOTAL 2.86% to 4.46%

Sources: “Evaluating Financial Planning Strategies And Quantifying Their Economic Impact,” The Kitces Report, Volume 3, 2015 referencing data from: “Alpha, Beta, and Now…Gamma”, Morningstar, 2013; “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha”, Vanguard, 2014; “Capital Stigma: The Advisor Advantage”, Envestnet Quantitative Research Group, 2015.

When you add up all of the preceding areas, you can see how tactical pieces of advice generate value-add of up to 4.46%, a range that is significantly higher than the average household fee that is being charged to Canadians investors.

For example, clients may perceive “behavioral coaching” as a vague benefit that does not materially impact the portfolio, or by extension, your value creation. Consider this misperception as an opportunity to raise awareness: A long-term study of U.S. stock market performance shows investors lagged the index by 1.3% annually between 1926 and 2002,³ in large part due to asset turnover. Money flowed in when markets ran hot, then back out when fear and panic returned. We saw this exact phenomenon play out in 2009, when many shell-shocked Canadian investors took a year-long hiatus from equity markets, creating a permanent lag in their portfolio performance relative to the benchmark.

Chart 3) Behavioral Coaching Provides REAL Value

Historical performance of $100K invested in the S&P 500

Source: S&P 500 Index performance from January 1, 2006 to April 30, 2019, Bloomberg Finance L.P.

The above chart illustrates how exiting the market in February 2009, at the tail-end of the Financial Crisis, and re-entering only a year later resulted in a total portfolio value in January 2019 of $161,547 versus $235,989 for an investor who had stayed invested during the market dip – a costly move that can never truly be recovered. We hope that concrete data like this becomes a persuasive tool in your communication box to help explain the intrinsic worth of professional financial advice.

The Best Defense is a Good Offense

When conducting in-person meetings with clients, aim for maximum context. In addition to stating your fees up front, focus on the service offering to ensure the conversation does not automatically link fees to performance, but rather to deliverables which will ultimately improve the client’s circumstances. Clients want to understand fees. What is interesting and essential to note is that most people are more concerned about fee clarity than the actual fees.

From a tactical perspective, it can help to put costs as a percentage or dollar value instead of basis points, so clients clearly understand the numbers. Some Advisors also list the full range of services à la carte, giving clients the freedom to construct a truly bespoke experience that suits their retirement goals and personal circumstances. No matter the proposition, it’s crucial to explain each item in detail. Put everything down on paper; it should be formally documented and accessible for future reference not only for the sake of record-keeping, but to help clients recall what was previously discussed.

Recent shifts in the economic cycle will likely prompt a greater number of clients to ask about fees.

Recent shifts in the economic cycle will likely prompt a greater number of clients to ask about fees. If they bring up the subject, take advantage of the opportunity. Rather than simply outlining the costs related to products, clarify the differences between fee-based, embedded and commission-based compensation for the products you sell and the advice model you use. Cover the entire cost of investing, not just your compensation. Explain how you avoid conflicts of interest – and be proactive about following up with regular communication touchpoints, be it meetings, newsletters or social media. Good old-fashioned face time and consistent communication are more important than ever to deepen client relationships and value perception. Be proud of what you have to offer, ensure clients have the requisite material to understand how you’re adding value and, when in doubt, refer to the proof points above.

For more compelling research on the value your services provide, contact your BMO Global Asset Management Regional Sales Representative for an in-branch presentation and additional client-facing materials.

¹ “Canadian Mutual Fund Investor Survey,” Pollara Strategic Insights, July 2018.

² “Making Choices, Finding Growth: The State of Retail Wealth Management 8th Annual Report,” PriceMetrix, 2018.

³ Ilia Dichev, “What Are Stock Investors’ Actual Historical Returns? Evidence from Dollar-Weighted Returns,” American Economic Review, vol. 97, no. 1, March 2007.

BMO Global Asset Management Disclosures:

This article is for information purposes. The information contained herein is not, and should not be construed as, investment advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms.

®/™ Registered trade-marks/trade-mark of Bank of Montreal, used under licence.

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