Should Financial Advisors Publish Compensation On Their Websites?

Financial 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.

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.

The 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.

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.

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.

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.

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.

More 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.

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

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.

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.

Commissions 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.

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.

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.

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.

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.

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.