Step 1. At the first meeting…

  • Have an open discussion where you lay out the facts before anyone makes commitments, says Doug*, a Calgary-based advisor.
  • Tell your client she’ll be charged X% of all assets she has at your firm, and stress this sum is charged every year.
  • Or, if you’re paid using trailers, explain that part of the MER goes towards your commission.
  • Break down how that covers fees for third parties (i.e., portfolio managers), as well as the firm.
  • Explain that the percent amount also includes your compensation for services rendered.
  • Don’t forget to outline commission structures for any insurance you sell (see “Life, term and living-benefits insurance” ).

*last name withheld

If a client asks about hidden fees, tell her the management fees are all inclusive, says Sybil Verch, vice president, branch manager, Raymond James. The fees include trading costs and pay for overhead, the management team and your compensation. She adds there is one exception. “In some cases we may own a mutual fund or ETF in a fee-based account, where other small fees apply. If so, it’s clearly explained to the client.”

Step 2. If your client is surprised…

  • Ask what her concerns are.
  • Go over the fee structure again, including who is paid what (e.g., firm and portfolio manager fees).
  • Suggest less expensive alternatives—perhaps that she should switch to a passive portfolio, which requires less management and, therefore, reduces costs.
  • If moving to passive management isn’t suitable due to the client’s stated growth needs, then re-explain why she has been placed in those funds.

Use these sample scripts

For investment advisors

I’m an advisor with X firm. I understand you’d like to look at ways to grow your portfolio. And, based on what we’ve discussed, I’ve structured this investment proposal for you. It includes: [List items such as portfolio summary, opportunities to diversify, risks and potential rewards].

The total cost of all services provided will be X% of your total assets at this firm, or trailer X. This is your annual fee [$X]. This amount pays me for my work. Included in your fees may be:

  • financial planning;
  • tax planning;
  • investment research and advice;
  • portfolio management;
  • banking services (i.e., arranging loans);
  • charitable/philanthropic endowments;
  • intergenerational wealth transfer strategies;
  • corporate executorships;
  • goal/objective monitoring and reporting;
  • performance reporting;
  • education funds planning; and
  • cash flow and income management.

The fee also covers a variety of costs, both for third-party fund managers and my firm. These include: administrative fees for maintaining the account, such as custodial, reporting and trading expenses; CRA tax filing obligations; and research on securities and portfolio managers. It also includes business costs such as rent and administrative assistance.

Note that you aren’t surcharged for any of these services—they’re embedded within the total cost. My clients pay me, not my firm.

Let me know if you have any concerns [If that’s the case, offer some less expensive alternatives, including switching to a more passive portfolio. But also explain the client won’t be able to choose his/her investments].

Source: Doug (last name withheld), a Calgary-based advisor

For insurance advisors

If you’re a career agent, modify as needed.

I’m an independent advisor. I deal with many insurance companies, but not all. Here are the ones I deal with [List companies]. I do so because I’ve found they are best for my clients—their claims handling and underwriting are superior to other companies’.

I’m not tied to these companies; I don’t have shares or loans with them.

These companies pay me through commission, but those are essentially the same regardless of the company, with a 1% to 2% change over time.

This policy is expected to last X years or longer. If you own this policy for 15 years, you’re paying me X% commission in total, which is $X.

If you own it for 40 years, you’re paying me X% and $X.

Insurance companies know it’s expensive for me to help clients and set up their accounts, so the company accelerates that payment up front. Here is the commission you pay me this year [$X].

It drops dramatically in the second year of the policy and remains low every year thereafter.

Here’s what my commission pays for. First, it covers the service for your policy. I change your beneficiaries. I make changes to your rider. I can modify your coverage. When you pass away, I will deliver the claim cheque to your beneficiaries.

Second, it covers my expenses: my overhead, staff salaries and advertising, as well as taxes.

Third, it helps pay me. I don’t get paid a salary, so this is the only way I can make a living.

I should also tell you I am eligible for financial incentives if I bring more business and do a better job. So I may be eligible to go on a sales trip.

I’ve chosen this policy because: [List reasons]. If you terminate this policy next year, this will happen: [Explain surrender charge on UL policies]. I will also have to pay my commission back to the insurance company.

Source: Byren Innes, senior vice president and director, NewLink Group

For advisors who charge by the hour

I’m a financial planner who charges fees by the hour. Here’s my approach to financial planning assignments.

I ask people or couples to complete financial counseling information sheets, and bring them to our meeting. As part of that preparation, people write down any questions they have in advance (you can ask more during our meeting).

This preparation lets me learn about your family/financial position, and ensures I focus on your specific questions and objectives at the meeting. Although I anticipate we’ll get along well, you’re not going to want to spend more time than you have to in my office, since I charge by the hour.

I also ask you to bring your most recent tax return, a recent retirement pension estimate, and any other information you think is relevant to your questions (e.g., your investment portfolio statements for investment advice, and your will for estate planning advice).

Bringing this info improves the efficiency and effectiveness of our meeting and, hence, minimizes my fees.

Typical first meetings are about two hours, with additional time if I need to do detailed calculations or write you a report. My fee for personal financial planning is $X per hour, plus taxes. All information is held in strict confidence. I’m going to send you an email with this information and include the questionnaire. If you’re interested in going further, I would ask you to phone me to set up a meeting [Provide phone number during call and within email].

If we do meet, please bring the completed questionnaire. Again, this helps me get up to speed on your situation quickly, thus saving you time and, ultimately, money.

Thanks, and I look forward to hearing from you.

Source: Blair Corkum, fee-only advisor at Corkum & Arsenault

Step 3. At the annual review…

  • Discuss how the portfolio has performed, where her assets stand and, as a result, what her total costs are.
  • Unless the client asks, you don’t need to get into a grid-level breakdown of how you’re paid. “If a client buys a GIC through me, I explain the yield that they get and that there’s no additional fees on that GIC,” says Verch. “However, [I’ve explained] I do get paid because the issuer of the GIC pays me a commission of a quarter point per year of maturity.”

Note! You may have to deal with sticker shock again. If so, repeat Step 2

If you charge a flat, hourly fee, explain that total cost each time you provide a service— not just annually. And provide an invoice each time.

Check out this sample invoice.

Advisor Group 2013 Salary Survey results

Source: Advisor Group 2013 Salary Survey

n=999. Margin of error +/- 3.1%, 19 times out of 20.

Suzanne Sharma is the associate editor of Advisor Group.