When explaining to clients how you’re paid, keep in mind they may be brand new to many investment concepts, including compensation. Or, they may not have paid full attention when a prior advisor tried to explain the concepts.
It’s best to ease clients into the conversation to make sure they fully understand all the details of your payment structure. Being transparent will help them feel more comfortable, since they’ll know where their money’s going.
Here are some tips for clearly explaining your method of compensation.
1) Use plain language
Regardless of whether you receive commission-based or fee-based payment, some of the details will be tricky to understand. For example, concepts like front-end versus back-end-load commissions, and terms like assets under management may be new to clients. Use language they’ll understand, and take time to explain any unfamiliar words. You want the client to leave your office more knowledgeable, not confused.
2) Use examples
Including examples in your explanations will make new concepts easier for clients to grasp. But keep the math straightforward. Using round figures, such as a $10,000 investment or a $100,000 portfolio help simplify the math and make it easier to explain complicated details like MERs and redemption fees.
3) Don’t rush the conversation
These concepts may be old hat to you, but they’re new to your client. If he thinks you’re trying to rush the explanation or aren’t fully engaged in the discussion, she’ll feel uncomfortable. You also run the risk a client will feel less-than-intelligent if he doesn’t grasp details quickly. Take the time to make your compensation method as clear as possible by speaking slowly, pausing and asking the client if he has questions.
4) Be confident
It may feel awkward to discuss your earnings, but such transparency will gain your clients’ respect. Be upfront about your payment structure because if the client finds an unexplained fee at a later date, she’ll wonder if you were trying to hide it.
5) Inform, but don’t over-inform
There is a fine line between transparency and an onslaught of financial minutiae. You need to explain the difference between front-end and back-end loads if you use commission-based payment. But you don’t have to go into detail about redemption fees unless the client actually plans to sell an investment. Your client can only learn so much in one day, so stick to the necessities. Give him some time to absorb the information. Then ask if he’d like more detail via email or a follow-up call.