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Mitch Anthony's Intuitive Advisor

The Practice Doctor is IN

Honesty is Always the Best Policy

by Al Depman, CLU, ChFC, CMFC, BH
Practice Management Consultant

Al Depman photoOne of the side effects of the pending "fiduciary standard" legislation promulgated by the Department of Labor is to put a renewed emphasis on how advisors communicate their compensation to clients and potential clients. In my consultations, the best practice has always been to clearly articulate the methods of compensation upfront in initial interviews. I've found that clients won't begrudge you the right to be compensated for the value you add, so long as you are straightforward about it.

The following language is a solid way to cover the compensation issue, especially for financial planners who are open to working with clients in a holistic manner.

###

"Before we move on, I'd like to cover how we get paid. You have three options. Each of those options represents a relationship our clients choose to have with us:

Option One

The first option is the most common: a fee-based planning relationship. Many times, clients just want advice on all the different aspects of their financial picture and how it interacts with their goals and lifestyle. We give recommendations for all the areas you see in this chart.

Note: this is where you should present your client a clean, simple graphic that points to the following:

  1. current financial position (budgeting, cash flow management, debt management),
  2. protection/insurance planning (also benefits through an employer),
  3. investment planning,
  4. retirement planning,
  5. basic tax planning, and
  6. estate planning.

For this service, we charge a fee based on the complexity of the plan. The basic financial plan provides an analysis of your current financial status in all six areas mentioned, with a set of recommendations; for example, getting an IRA, adjusting retirement allocations, or buying life insurance. These recommendations would be implemented by you, or anyone you choose. If you want a basic financial plan focused on these six areas, you'd go with the personal financial planning category, which is $1,500 per year, billed $125 monthly. If you have more advanced planning needs, higher net worth and income (which usually means more advanced tax planning), then you are in the advanced financial planning category. Fees would vary depending on the complexity and level of involvement you want with us.

Option Two

A second option is through an investment advisory relationship. This is when clients want us to manage a specific investment or retirement account. We charge an annual fee of 1 percent for this service.

Option Three

The third option is through a transactional relationship. If you want to start a brokerage account or need to purchase an insurance product, this might be a better option for you. These products have fees built in—commissions—so the company administering the product pays us out of sales of those products. This is the way you pay fees through most internet-based financial transactions.

Which platform sounds like it may be best for you?"

###

If they are interested in option one, fee-based financial planning, tell them you'll email the disclosures and contract so they can read and review it before your next meeting. In that meeting, explain the process you'll be following, answer any questions, and sign the contract.

If they are interested in option two, an investment advisory relationship, tell them that it also includes a meeting to explain the process, as well as provide insights on the specific strategies that may work best for their specific portfolio. Have them provide statements before the meeting, so you can make recommendations.

If they are interested in option three, a transactional relationship, do some fact-finding to determine the product(s) needed. Inform them that you'll discuss the product choices available to them in the next meeting, so you and they can see which one make the most sense for their individual circumstances.

If they are not sure, be sure you let them know that this is normal and certainly do not pressure them. You should still have an educational meeting where you review what they've provided to you before the meeting. During that meeting, and after more discussion, you can make a recommendation on what you think the best way to proceed is—and why.

I have some samples of the handouts used with this discussion. Email me, and I'll be happy to share a couple with you.

Until then, the Doctor is OUT!


© 2017 Al Depman

Al Depman, CLU, ChFC, CMFC, BH, a.k.a. "The Practice Doctor", is a contributor to The Wall Street Journal, has authored numerous articles in professional publications on practice management, and is the author of the book, How to Build Your Financial Advisory Business and Sell It at a Profit, available from McGraw Hill. Al combined his Liberal Arts studies with 10 years of management experience with McDonald's Corporation to enter the financial services world 25 years ago. Since then, Al has evolved from an MDRT-level sales rep into a full-time consultant specializing in helping others engineer their business practices to the next level. Contact him at aldepman@aol.com.


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