Most clients come to the table knowing little about how you’re compensated.
So clarifying what you view as the benefits of charging fees rather than commissions, as well as the difference between the two, helps clients better understand your role.
Here are some questions your client will probably ask, and some ideas for how to respond.
Q: What is the difference between fee-only and commission-based compensation?
A: Commission compensated advisors receive a percentage of the return an investment makes within a client’s portfolio. They can receive these commissions right off the top from what clients pay, from fund dealers, or from both. Using a fee-only approach means I receive compensation only from you, and will never receive commission from a company for selling its products.
Q: What type of fees do you charge?
A: As an independent financial advisor with no direct ties to a fund company, I can set how I charge fees – hourly, monthly, quarterly or annually. An advisor can also charge a percentage of your account, called assets-under-management or AUM. The approach I take is [discuss your fee structure].
Q: Is it possible to use a combination of commission and fees?
A: Yes. There are advisors who do this – charging clients a fee, and receiving a commission on some products. Often, they take commissions on things like insurance products, in which commissions frequently are embedded, and charge a fee for placing other funds that are structured to have low commissions. In some cases, these advisors will refund commissions, or a percentage thereof, back to clients.
Q: What is the advantage for me to pay fees rather than commission?
A: It means I am completely objective and am better inclined to create a plan that’s entirely in your best interests. I don’t receive any compensation from companies, which means my loyalty is to you, not them. The focus is on advice. Also, I don’t have any inclination to promote specific products in order to obtain monetary incentives they may offer.
Q: What is your incentive for charging fees rather than commission?
A: First, I can focus on being an advisor. I don’t have to worry about meeting quotas or bringing in enough clients. I can do my job and be loyal to my clients. Further, fees give me a guaranteed income stream.