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Should Financial Advisors Publish Compensation On Their Websites?

Paladin digital marketing helps fee only financial advisors with their marketing

Recent Paladin Digital Marketing analysis shows financial advisors have several strategies for disclosing compensation on their websites.

Our experience also shows significant marketing consequences when financial advisors choose between full disclosure, partial disclosure (how they are compensated), and non-disclosure.

For example, our data show:

  • Less than 5% of financial advisors publish their fee schedules on their websites.
  • 64% describe how they are compensated on their websites, but only if their primary form of compensation is a fee. 
  • 1% of financial advisors, who are commissioned only, describe how they are paid for their financial advice and services on their websites.
  • This data suggest disclosure of compensation on websites is a very controversial topic.

It is fair to assume advisors who work for fees are in a better place for practicing disclosure than advisors who work for commissions. That’s because investors may view advisors as salespeople when their sole source of compensation is a commission from the sale of investment or insurance products.

This article assumes investors have used the services of financial advisors in the past. This means they are somewhat knowledgeable about the ways financial advisors are compensated. This has three strategic consequences: 

  • investors know what to look for when they visit financial advisor websites.
  • They know what is being withheld from them on the websites.
  • It can be risky to withhold information from them.

So what are the prevailing practices, and which ones work the best? We will cover these topics and more in this article.

  • Should financial advisors publish their fee schedules on their websites?
  • Should financial advisors describe their method of compensation on their websites?
  • What are the primary types of financial advisor compensation?
  • What about publishing fee schedules?
  • Should financial advisors make investors ask the right questions about their compensation?
  • Does full disclosure on financial advisor websites build more trust?
  • Should financial advisors make investors ask the right questions about their compensation?
  • Why withhold information about your compensation?
  • Should financial advisors voluntarily disclose layers of fees?
  • What is covered by the asset-based fee?
  • Should financial advisors discuss tax deductions associated with financial advisor fees?
  • Why practice disclosure for financial advisors’ compensation on their websites?
  • How do financial advisors practice full disclosure for their compensation practices?
  • How do hybrid financial advisors explain their use of commission-based products?
  • Should the financial advisor fee be aligned with the number of hours worked?
  • Why are commission advisors more likely to withhold their compensation method?
  • Why do so many financial advisors withhold information about their compensation on their websites?
  • How to show value during the ETF era?
  • How to explain a 1% financial advisor fee to investors?
  • Why offset fees with commissions?
  • What are the best practices for disclosing compensation on websites?
Chapter 1

Should financial advisors publish their fee schedules on their websites?

Publishing a fee schedule on your financial advisor websiteFinancial advisors have a lot of reasons for not publishing their fee schedules on their websites:

  • They don’t want their competitors to see the information
  • They may not be competitive with other financial advisors
  • Fee schedules can be confusing (minimums, sliding schedule)
  • Investors don’t know how to compare fees and services
  • Investors may exclude them from their searches
  • They prefer sales meetings so they can counter objections

Based on the extremely low publishing rate on financial advisor websites, I would have to say advisors should not publish their fee schedules on their websites.

There is one possible exception. When the financial advisor’s fee schedule is significantly lower than the competition, there is the potential for competitive advantage. Examples of advisors with lower fees could be Robos and virtual financial advisors.

Chapter 2

Should financial advisors publish their method of compensation on their websites?

The answer is yes if the financial advisor works for fees. There is a big difference between publishing a fee schedule and describing how fee-for-service financial advisors are compensated. 

The benefit is financial advisors are practicing full disclosure on their websites without publishing their fee schedules. Advisors are publishing important information without publishing their actual fee schedules.

Think of this as partial disclosure.

Chapter 3

What are the primary types of financial advisor compensation?

A group of financial advisors who market themselves through their website marketingThe addition of new compensation arrangements may be forthcoming as financial advisors struggle with changes that are impacting the industry. 

Nothing is more profound than the impact of the Internet. It gives investors unprecedented access to information about financial advisors, including their compensation methods.   

The most popular arrangement for RIAs and IARs is an asset-based fee that starts at 1% on the first million of assets and utilizes a sliding schedule of fees after that. New money, market appreciation, and reinvested income can cause these fees to grow. This asset-based or lower fee will most likely be published on a financial advisor's website. 

A fixed fee may be charged for a financial advisor’s planning services. For example, the advisor will produce a moderately complex plan for a one-time fee of $2500 and $500 for annual reviews. Advisors who charge higher fees have to be cautious. Some planners cover the cost of planning with their investment fees so there is no incremental fee. Other financial advisors for who third parties pay commissions will claim their planning services are free. Most advisors are not inclined to publish their fixed fees on their websites. Investors don’t know what they are getting for their money, so they may be comparing apples to oranges. If they publish fee schedules on their websites, their ultimate concern is that some investors will exit their websites without talking to them.

Some advisors are also comfortable quoting an hourly fee similar to CPAs and attorneys. However many investors are not comfortable with this type of open-ended compensation arrangement.

A more recent fee is the subscription model. Investors pay a monthly fee for one or more primary services - planning, and investing. This is an example of a recurring fixed fee.

Some advisors charge multiple fees for their various types of advice and services. For example, they charge a fixed fee for their planning services and an asset-based fee for their investment services.

Chapter 4

Should financial advisors make investors ask the right questions about their compensation?

Some investors are more knowledgeable about the expenses that financial advisors charge than other investors. In particular, investors who have used the services of financial advisors in the past.

Some financial advisors hope investors do not know the right questions to ask about their compensation. They practice the don’t ask, don’t tell method of marketing.

Other advisors are more forthcoming about their compensation, including the methodologies for calculating compensation amounts: Asset-based, fixed, hourly, subscription, and commission.

Chapter 5

Does full disclosure on financial advisor websites build more trust?

Perhaps the keyword in the above heading is “full”. There may be a big difference between a financial advisor’s compensation and the total fees deducted from an investor’s assets.

It is reasonable to assume knowledgeable investors know what they are looking for when they visit financial advisor websites on the Internet. That is because they have worked with financial advisors in the past.

Investors will visit several websites when they use the Internet to find and research financial advisors. They seek specific information when they visit the sites. When one website provides information and another does not, they will know what is being withheld from them.

Investors will be inclined to assume the worst when there is a lack of disclosure. For example, financial advisors withhold information about their compensation because it is excessive. If their compensation was competitive, there would be no reason to withhold it. 

There are pros and cons, but It stands to reason practicing partial or full disclosure is a way to build incremental trust, in particular, if your key competitors do not practice disclosure.

Chapter 6

What is covered by the asset-based fee?

The answer will vary by advisor. The core of the question is whether planning and investment services will be covered by one asset-based fee. There are also wrap fees that can cover a number of different services. 

Some advisors bundle their planning and investment together and cover the cost of both services with one asset-based fee. Other financial advisors unbundle the services and charge an asset-based fee for investment advice and services and a fixed or hourly fee for their planning services.

Investors with more assets pay higher fees. At the same time, they usually have more complex planning requirements: Financial, college, retirement, charitable, estate, and legacy, which can justify the higher fee.

Chapter 7

Should financial advisors discuss tax deductions associated with financial advisor fees?

Consider discussing the current tax code for deducting financial expenses with your CPA. All of the provisions in the tax code are subject to frequent revision.

Investors generally qualify for this tax break when their investment expenses exceed 2% of their AGI (Adjusted Gross Income). For example, if the investor’s AGI is $250,000, they could deduct financial service expenses that exceed $5,000.

You can also pay fees out of IRAs, so at least you are paying with pre-tax dollars. But, the deductions mean the assets are no longer available for producing capital appreciation, dividends, or interest.

This is a topic worth discussing if you believe a client would benefit from favorable tax treatment.

Chapter 8

Why practice disclosure for financial advisors’ compensation on their websites?

Financial advisor website design is made more effective by using Paladin Digital MarketingMore knowledgeable investors know what information is being provided to them on financial advisor websites and what information is being omitted. This may be based on their knowledge of financial advisor business practices or the information provided to them on the other advisor websites they researched. 

Investors may seek this information to compare financial advisors to each other. In this case, the more compensation information they provide, the better.

Chapter 9

How do financial advisors practice full disclosure for their compensation practices?

The most common strategy is for financial advisors to describe how they are compensated but not how much they are compensated. Advisors hope this is enough information and that it also satisfies investors’ need for disclosure about the advisors’ compensation practices. 

For example, a financial advisor may choose to disclose the following eight points of information about their compensation (fees) on their websites.

  • Charge an asset-based fee (% of assets)
  • The fee is based on the current market value of the client's assets
  • Market valuations are conducted at the end of each quarter
  • The fee is deducted from a designated account each quarter
  • The fee is billed quarterly in arrears
  • A sliding schedule of fees is used
  • The fee is based on a $250,000 minimum asset requirement
  • The fee is based on a month-to-month service agreement
Chapter 10

How do hybrid financial advisors explain their use of commission-based products?

Hybrid financial advisors can provide investment advice for a fee or commission. The commission-based advice could cover their use of investment and insurance products.

One justification for the use of commission investment products is small investment accounts that do not meet the financial advisor’s minimum asset requirement are invested in load mutual funds. 

The advisor’s investment advice requires a certain amount of assets for adequate diversification. There is additional risk when assets are less than adequate. Advisors may recommend load mutual funds for these assets.

A justification for using commission insurance products is to make sure the insurance advice is compatible with the financial advisor's planning advice. There is no conflicting or duplicate advice regarding risk management.

And, of course, advisors benefit when this strategy keeps their clients away from potential competitors.

Chapter 11

Should financial advisor fees be aligned with the number of hours worked?

There is no correlation between a financial advisor’s compensation and the number of hours worked. In particular, this is true for investment advice and services. Portfolio management is frequently based on models. The most labor-intensive activity is attending service meetings that are increasingly virtual, but can still be in person - the advisor or client location.

The only exception would be financial advisors who are paid by the hour for their advice and services.

If a financial advisor charges a 1% fee on the first $3 million of client assets, does it cost three times as much to manage a $3 million dollar portfolio? There could be a few additional investments and hours, but the advisor’s costs certainly do not triple. These portfolios are very profitable.

Planning services are a different story. Clients with complex planning requirements can require substantially more time than a simple plan produced by the financial advisor’s software.

Chapter 12

Why are commission advisors more likely to withhold their compensation method?

Financial advisor compensation should be disclosed as part of your financial advisor marketingCommissions are associated with salespeople. The question is do investors want salespeople planning their financial futures and managing their assets? 

The answer is probably not, which is why most financial advisors who receive commissions are reluctant to discuss payment methods or amounts.

Some financial advisors who receive commissions will even claim their advice and services are free because they are paid by third parties. They fail to disclose that the third parties raise their fees to cover their marketing expenses, i.e. commissions that are paid to financial advisors.

There is also a reasonable probability that a percentage of investors have had a bad experience with commission sales representatives in the past. This bad experience could cause investors to avoid commission sales representatives in the future.

Commission sales representatives may have to compete with fee-only advisors who are also financial fiduciaries.

Chapter 13

Why do so many financial advisors withhold information about their compensation on their websites?

Financial advisors want investors to visit their websites and initiate contact. Anything that negatively impacts their number of contacts (leads) should be minimized or omitted.

Some advisors may charge a higher asset-based fee: 1.25% or 1.50% which may or may not be competitive with other financial advisors that are being interviewed by investors.

Some financial advisors will disclose this information during an interview when they can use their sales and relationship skills to overcome any significant objections.

Chapter 14

How to show value during the ETF era?

Advisors have to convince investors they are trustworthy financial experts. This is a critical early step in their sales processes.

Advisors may not be the cheapest option, but they are the best option. This can mean there may not be a positive fit with some investors. 

Financial advisors need differentiating characteristics that benefit investors. The practice of full disclosure may be one of those characteristics.

Value is more challenging when many financial advisors deliver the same advice and services (ETFs, passive management) for the same or similar fees.

There is also a significant intangible when advisors market their services to Do It Yourselfers (DIYs). The expertise of a financial advisor can help investors avoid making serious financial mistakes.

Chapter 15

How to explain a 1% financial advisor fee to investors?

As discussed, 1% is a common, asset-based fee that is charged by most financial advisors. The issue is not the fact that the fee is based on amounts of assets. The challenge is providing a rational reason for charging a 1% fee.

On the one hand, it is the financial advisor’s incentive for helping investors grow and preserve their assets. As Fisher Investments likes to say: “We do better when our clients do better”. Fees go up with market appreciation, reinvested income, and new money from current clients.

A better explanation is based on mathematics:

  • The client’s assets under management are $1,000,000.
  • The client’s performance is 10% or $100,000.
  • The client earns $99,000
  • The financial advisor’s fee increases by $1,000
  • Does this 99:1 ratio make sense to the client

Very few investors would argue that the 99:1 ratio is not a fair distribution of a portfolio’s increased market valuation.

Chapter 16

Why offset fees with commissions?

Check with a compliance officer before adopting this business practice.

Let’s assume your goal is generating recurring revenue from your client’s assets. Let’s also assume you are a full-service financial advisor: Planning, investment, and risk management.

You provide risk management so your clients do have to deal with insurance agents. Your clients win because they receive better advice that is coordinated with your other advice and services. You win because you keep your clients away from potential competitors.

The question is, what do you do with any insurance commissions that are produced by your sales?

One answer is to use them to offset the fees that you charge your clients. Then there is never a question of double-dipping, and it is a great way to prove you are trustworthy.

If the above strategy does not work for you, at least your clients benefit from coordinated advice and services.

Chapter 17

What does Paladin recommend as best practices for disclosing compensation information on financial advisor websites?

Paladin recommends full disclosure for financial advisor compensation on websites. This gives investors the information they need to compare financial advisors to each other. We do not recommend publishing fee schedules unless those schedules produce a competitive advantage.

Paladin recommends full disclosure, during the sales process, for all other investment-related expenses that are deducted from your client’s accounts.

Paladin recommends investors obtain the same information from all of the financial advisors they are interviewing.

Paladin recommends this information is documented, so investors have a record of what is communicated to them.

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