Dollars, sense and (client) sensibilities

This year, for the first time ever, we’ve surveyed clients as part of our Sixth Annual Dollars & Sense Survey to get their take on your service. The numbers are in and there is some good news to report, but unfortunately there’s also a world of disconnect between the ideals you espouse and the reality clients perceive.

First, the bad news:

It turns out that clients do value items like engagement letters (76%), yet only half of the advisors we surveyed provide them. A staggering 84% of clients said they would value an investment policy statement, but only 47% of advisors say they provide them.

Next, let’s look at financial planning. Of the 60% of clients who have financial plans, 80% say their plan includes retirement planning and 78% have proper investment allocation. That’s great, but the numbers drop significantly when it comes to insurance, tax planning, estate planning and education planning for children — all key parts of a comprehensive financial plan.

This could mean a few things: Clients don’t understand what true financial planning is; clients don’t really have financial plans — just parts of one; or that (some) advisors are misrepresenting financial planning. In any case, it’s a problem that needs to be fixed.

Turning to fees, many advisors have told us that clients don’t care how they are paid. Admittedly, some don’t, but they are a very small percentage of clients we surveyed.

Whether clients care or not care, most advisors do talk about their compensation. Three-quarters of those surveyed prefer to do it verbally and 55% say they provide a document disclosing their compensation. When we asked clients the same questions, only half agreed that they were told how you were paid and only 35% said they received that information in writing.

The majority of you are paid by commission (54%), followed by fee and commission (18%), salary and bonus (17%), fee-based (4%) and salary only (4%). When we asked clients if they understood how their advisor was paid, 84% said yes. Exploring further, we found that 32% of clients think their advisor is paid by salary only. Another 30% say commission, while a full 17% admitted they didn’t know at all.

You more than likely have tried, at some point, to communicate what it is that you bring to the table but, for whatever reason, clients aren’t grasping or hearing your pitch. Because the information doesn’t seem to be sinking in, you’ll need to repeat these conversations until clients do get the message. Perhaps the last time you had this discussion was a few years ago. Maybe you only mentioned it once, during your initial meeting.

“We need to sit down and figure out exactly what we do, exactly what the clients want us to do, and what they’re willing to pay for,” says Marc Lamontagne, a fee-for-service advisor at Ryan Lamontagne, an advisory firm based in Ottawa. “I’m going to spend more time with clients,” he says, to make sure they clearly understand what service they’re getting and all the related costs. “I want to make sure we start to bridge that gap and move the answers closer together.”

Another strategy is to simply revisit client expectations each year, says Tom Golding, manager at TD Asset Management in Toronto. He asks clients about past experiences with advisors. “What do you want this experience to be like? Then right at the top, what the client is looking for is articulated by themselves and you can decide whether that fits or not.”

Having said that, if clients really want and value services like tax filing (61% in our survey say they do) and investment policy statements, make sure they understand what it costs to receive those services from you and what, exactly, they can expect in return.

Lamontagne says his service offering includes a promise to contact clients a certain number of times each year. As the client’s assets grow, so will the frequency of his calls. That said, if a client wants him to make contact 12 times a year, but their account size is relatively small, he’ll make contact, but will bill that client more for his time.

Some clients may be under the false assumption that financial advice is free since they aren’t writing you cheques and they don’t see any fees coming from their accounts. “A 2.5% MER on $100,000 doesn’t compute very quickly because you don’t see it,” notes Stephen Koury, a fee-for-service planner at Inter-Equity Asset Management in Mississauga, Ontario. “Whereas I give someone an invoice for $2,500, oftentimes I’ll get, ‘wow, that’s a lot of money’ because it’s a real dollar amount and the client can relate to it.”

As you can see, educating clients is still a work in progress, but informed clients are happier clients and happier clients are best for all involved.