Due to the implementation of CRM2, you need to be prepared to explain your fees.
There are three common questions clients ask, so start by drafting answers to these before meetings, says Grant Shorten, director of strategic insights at Renaissance Investments.
Below are the questions and his suggested answers.
1. Why do I pay an ongoing trailer fee?
To answer this query, Shorten suggests you tell clients that “when it comes to a managed product like a mutual fund, a total fee is charged to the investor in the form of an annual management expense ratio, or MER, [that] covers all of the expenses incurred by the mutual fund in the course of managing the assets invested in the product.”
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Also mention “this charge includes a sub-advisory fee, paid to the fund’s portfolio manager and her team [since] they make daily investment decisions on behalf of investors. Only a portion of MERs are paid to investment advisors [and that’s] in the form of a trailer fee, [which] compensates for our continued service to clients who own units in funds.”
Read: 3 tips to explain compensation and What’s in store for comp?
2. What am I getting for that fee?
Following the basic explanation of MERs, Shorten says to show clients “the list of expenses incurred by mutual funds is a long one. [Give] a few examples of those expenses, and of the other benefits and services [people] receive as part of those all-inclusive fees.” In the latter list, clients “will see expenses such as accounting and transaction costs.”
Read: How to frame fees
Also communicate your value beyond managing investments. “One the greatest benefits we bring to our relationships with clients is our [ability to help] manage their emotional states…We keep [them] invested when they’re tempted to run, and make important asset allocation shifts along the way. It’s difficult to quantify the amount of money [people] save when we coach them to avoid common investor mistakes,” but find ways to show clients how you help them “maintain discipline in a market that’s so often ruled by emotion.”
Read: 8 common investment mistakes and Investors regret decisions based on emotions
3. Why am I charged when my investment is underperforming?
To tackle this question, explain how “advisors and portfolio managers are paid to manage money during good and bad times,” says Shorten. Though it’s impossible to “eliminate drawdowns because capital markets move in a series of rallies and corrections, [the goal is] to navigate those movements over several market cycles,” and doing so requires expertise.
Read: How often should you rebalance?
What’s more, even though a mutual fund charges the same percentage fee regardless of the market’s direction, the dollar amount of that fee will decrease if the value of a client’s portfolio drops. That means “a percentage fee for all services places [investors] on the same side of the table as the advisors and the portfolio managers working on [their] behalf,” he adds.
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