Advisors have been pelted for decades with accusations of perceived high cost like, “You charge too much”, or “Why should I pay you a commission when I can get a no-load fund?”, or “Your fee is five times higher than a robo advisor charges.” The hard, cold fact is that the all-in cost of making investments has come down, in steps, for the same period of time that high-cost accusations have been thrown and advisors are left to justify their professional fees. Let me take you back a few years.
My first mutual fund trade as a new broker at Merrill Lynch in 1985 was for the American Capital Pace Fund. Part of my presentation addressed the advantage of only paying a one-time commission of, wait for it, wait for it… 8.5%!! That number is mind-blowing today but 34 years ago, it was the norm. A few years later, most fund companies lowered their equity fund loads to 5.75%. Brokers went nuts but gradually accepted 5.75% as the new norm.
The discussion those many years ago was based purely on cost and had nothing to do with value. Slowly, as fee-based platforms entered our world, the discussion shifted to what an investor would receive for fees paid. I remember a meeting I had in my days as a product wholesaler. A twenty- something IBD rep with two years in the business was excited to show me his fee menu. I have long forgotten the numbers but I will not forget the dismay I felt when I read his menu. He offered three levels of service with more client interactions at each level. Among other line items, financial plans were discounted and some hourly fees were waived at the highest level. The only reply I could muster when he asked what I thought was, “What percentage of clients are choosing each level?” He answered that almost everyone chose the lowest level of cost. Like Communism, his menu worked perfectly in theory but was horrible in practice. Why? His menu lacked the single most powerful factor in any discussion about fees: THE PERCEPTION OF VALUE!
I know you have heard it before: Be valuable to your clients. I also know that honestly connecting your value to the fees you charge is a blood pressure raising exercise. Check out how Joe Duran, CEO of United Capital, so eloquently frames the discussion. As I read the article, I was reminded of another IBD rep who perfectly figured out value vs. cost. She was in a small midwestern city fifty miles from a metropolitan area. When interviewed by an industry magazine after having reached production of $1MM in a year, she professed to not knowing what her paycheck would be when her commission payout was deposited. I asked her how that could be, to which she replied that she never considered what she would be paid when recommending investments to her clients. Her only focus was to put her clients in the best position to meet their goals. Sometimes that meant she earned nothing but trust and respect. In a town of that size, everyone knew her as trustworthy and respected. Cost was not an issue because the perception of value was enormous.