by Mitch Anthony
Several years ago, during a meeting with my insurance specialist, I noticed a slight reticence in his eyes. When I asked him about it, he responded, "When I was being trained, the guy who trained me would sit down with a client and show him the fund choices for a particular product. One hundred percent of the time he steered the client to one fund. I asked him why he didn't steer some people to the fund that had no upfront cost, and he said, 'Because I get paid 3.5 percent when they choose this fund.' How do you reconcile yourself with that? You have to make a living but you're supposed to do what is best for the client—not what is tolerable, or whatever you can pull by unwitting clients."
That's when I introduced him to "absolute transparency," a critical piece of the financial life planning equation. Absolute transparency is where you lay your cards on the table and demonstrate transparency about how you are being compensated for everything you do. Have you ever been to one of those car lots that doesn't play games with you? They tell you what they paid for a vehicle and what they want for it. They build a profit center in the back end of the business with their service center because they haven't sabotaged it on the front end with compensation games. It's the same principle.
Since that conversation took place, the financial services industry has become more transparent. Whether because these firms realized it was the right thing to do, or because they were caught misleading investors, more and more advisors I consult with have decided that being upfront with their clients isn't just the right way to conduct business, it's the only way.
My insurance specialist told me that every time he met with a client, he suspected that the client was sitting there wondering how much he was going to make out of this—and it made him uncomfortable. I advised him to remove that tension and potential for distrust from his life by being completely transparent. No more mystery. No more hiding behind jargon and fine print.
Your Value Proposition
Why should anyone choose to do business with you over another provider? "Because of the kind of relationship I bring," is the answer I expect to hear from most advisors. What will become of that relationship if your clients find out—before you tell them—how and what you are being paid?
Once the cards are on the table regarding what you make (and how you make it), you will find yourself naked and blushing if you are nothing more than a product pusher. Changing the descriptor on your business card to "Wealth Manager" won't change any clients' opinions of the value they have or have not received from you.
What follows is a discussion of the emotional reality on the value proposition of commissions, assets under management, and fee-only services.
In the venue of absolute transparency, you simply reveal what you get paid. Period. If it is fair, your clients will be satisfied. If it is not fair, they will go elsewhere. If it is unfair across the industry, downward price pressure will make the correction until it is fair. Most people are reasonable and understand that you have to make a living. They just don't care to see inequitable gaps between value received and price paid.
As a consumer I don't have a problem with reasonable commissions, and I don't believe that just because someone is receiving a commission that they are trying to exploit me for their paycheck. Some of the most upstanding, moral, and trustworthy individuals I know on this planet are being paid commissions.
I worked with one advisor who was one of the last of the old breed of "stock pickers." He charged me full commission rates for his picks. Those rates were sometimes 50 times higher than I once paid at a discount, online brokerage. But I managed to lose a lot of money at those lower per trade rates and came to understand the value of making good, well-researched picks. Believe me, I'm all for paying less, but I am content with the value I got from this advisor.
A final note on commissions: if a realtor comes to me and says, "I'll give you a choice; pay me five percent upfront or one percent a year for every year the buyer lives in the house you are selling," I'll take the upfront commission every time.
Assets Under Management
Why should you get paid more because I made more? Why should you be paid more for making the same allocation decisions regarding $2 million that you would regarding $1 million? I'm not asking these questions to say this approach is wrong but to see if you can answer me without blinking. If you hesitate, you are doubting the credibility of the value proposition of assets under management. Why do asset management fees arbitrarily decrease, say at $3 million under management instead of $1.5 million with one company, and at another level with another company? Because there is only so much you can do in terms of designing an allocation plan—and the price you charge, based on how much the client brings, will at some point come under scrutiny.
What happens when people figure out that there are only so many allocation scenarios, and that they can get the same suggestion from another party for less than half of what you charge? How will you vindicate your value proposition?
One advisor puts it this way to his clients, "I'm no different than you or anyone else in business. When I'm paid, I'm paying attention. What you need to decide is if it is worth it to you to have me paying attention to how your allocation is working out, and if it is still appropriate as your situation and the markets change."
If sufficient value is demonstrated on your part, then price is no longer an issue.
And what about absolute transparency on fees? While most quietly seep out quarterly fees, one advisor I know actually sends a bill. While most advisors would think he was crazy, he has never had a problem collecting. His clients bring in referrals and tell him that they trust him because he's "squeaky clean." This industry could use a little more of that squeaky sound.
One last thought on fees for assets under management. I meet a lot of advisors who will admit that they are paid for assets under management but are not paid for the "real value" they bring—the wisdom, planning, guidance, and coaching they just "give away." What will happen to your business when downward pressure is exerted on fees, and you need to begin charging for the services you have been giving away? Because many advisors were content making a living from the fees, they unwittingly depreciated the value proposition that possessed the greater, more enduring value for their business.
Are you continuing to provide the value that exceeds the price clients are paying? An executive in the investment business once said to me, "You know, I always thought the 'fee only' arrangement would be the purest and best value for me, but now I'm having serious doubts. I mean, the fee was worth it in the first year but paying the same fee year after year—after most of the essential work has been done—seems like a rip-off now."
Again, if the value doesn't continue or expand, why should the price continue?
I've met some in the fee-only business whose value proposition reminds me of a security company: "We're going to show you how you've been getting ripped off by commissions and fees." Once these advisors install their "security system" on your financial property, what is the perpetuating value? To monitor your property? There needs to be more value than that to justify ongoing fees.
No question: The fee-only proposition has gained momentum and is a cleaner business model, but fee-only advisors have a constant mandate to perpetuate and expand their value and intimacy of their service in order to justify the price being paid.
Enduring Value Proposition
Regardless of how they are compensated, smart advisors understand that the most enduring value proposition they can offer is to serve the life context of the client. As their clients' lives change, they will be there to help address the accompanying financial challenges and opportunities.
A life-centered value proposition is the only stable anchoring point for the advisor in an environment of rapid commoditization. "If you help me navigate financially through life, make the most of my life, and are focused on what matters in my life, then your value will most certainly eclipse the price paid for it." When you are confident in the value you bring and the company you deliver it with, you will no longer be afraid of absolute transparency.
Finally, be sure you tune into your clients' life goals and transitions (check out the brand new version of MyFLPTools for tools that you can use to help clients through these life changes). Transparency, combined with having an intimate knowledge of where they've been, where they are, and where they want to be, will ensure you retain clients for life.
© 2014 Mitch Anthony
Mitch Anthony is the founder and president of Advisor Insights Inc. and the Financial Life Planning Institute, the leading provider of financial life planning tools and programs.
For almost two decades, Mitch and his team have provided training and development for both individual advisors and major organizations throughout the world. Mitch personally consults with many of the largest and most-recognizable names in the financial services industry on both financial life planning and relationship development.
Mitch has been named one of the financial services industry's top "Movers & Shakers" for his pioneering work, and is interviewed by the media on a regular basis. The Institute is partnering with both Texas Tech University and the University of Georgia to develop financial life planning programs for their undergraduate programs. Mitch is a popular keynote speaker, columnist for Financial Advisor magazine and Journal of Financial Planning, and host of the daily radio feature, The Daily Dose, heard on over 100 radio stations nationwide.
Mitch is also the author of many groundbreaking books for advisors and consumers, including perennial bestseller StorySelling for Financial Advisors, cited by "Financial Advisor" magazine as the number one "must-read" book for financial professionals. Mitch's other books include The New Retirementality (now in its 4th edition), From the Boiler Room to the Living Room, Your Clients for Life, Your Client's Story, The Cash in the Hat, and The Bean is Not Green. For information on these books and more resources, click here.
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