Help Your Clients Understand Account Types and Compensation
With more demands on your time, having conversations with clients will be critical to determine what account type is in their best interests and to construct comprehensive investment plans aligned with their specific goals.
Advisory relationships differ from client to client. There is no one- size-fits-all approach that can be taken as a fiduciary. Determining the relationship that is in the best interest of your clients requires having a strong understanding of their needs and goals, and clearly defining the services they want you to provide as their financial professional.
A number of factors play a role in determining what type of account is best for clients, including the investable assets they have under management, their planning needs and the active management needed for their investments. The main difference in account relationship types is the manner in which the financial professional will be compensated.
Explain what a fiduciary standard is and what it means for the relationship
- A fiduciary standard means financial professionals have a legal obligation to act in their client’s best interest when dispensing investment advice.
- Explain that you may need to change some official aspects of your relationship with your client, but that those aspects should not impact the general nature of your relationship.
Discuss how you were compensated before, and what may change
- Explain to your client that the structure and affiliated compensation of some accounts will need to change. Tell them that previously you were compensated via the investments you chose for your client’s account.
- Specifically discuss with your client the differences between a continued commission-based model and a fee-based compensation model, which may be more streamlined.
Explain the difference between an advisory account and a transaction-based account
Client’s Needs: Define financial life goals (retirement income, college, legacy, etc.); provide ongoing financial and wealth management support (estate, trust, financial planning, budgeting, etc.)
Potential Services Provide: Evaluate financial profile; set financial strategy; select investment managers as needed; manage strategy as time passes and markets or needs change.
Benefits for Client: Allows advisor to provide comprehensive investment advice for clients as market, economy and clients’ lives change.
Compensation: Fee-based and independent of investment choices made.
Client’s Needs: Account oversight and wealth management support.
Potential Services Provide:Establish objective-based portfolios with asset allocation incorporated;provide ongoing financial strategy management.
Benefits for Client: Can be a lower cost option for clients who do not need to make many adjustments to their portfolios.
Compensation: Transactional compensation with fees disclosed to client.
Questions to ask your client to determine the appropriate account type
Here are some questions you can ask your clients to help determine which account will be the best fit for them:
- What are your short- and long-term financial goals?
- Would you like help working through your current financial plan?
- Do you have a working budget? If not, would you like me to work with you to create one?
- Do you have both taxable and non-taxable (retirement) savings?
- Where do you hold your different savings? Multiple locations?
- Would you like support working with other professionals, such as accountants, tax attorneys, etc.?
Reaffirm your commitment to each client
- Tell your client that this change in account type and compensation in no way alters your long-standing commitment to their financial health and investment success.
- Make sure your client understands that whatever is in their best interest is your primary focus.
- Conclude by letting them know to call you if they think of any other questions regarding this change or anything in general.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
This material is intended for use by financial professionals or in conjunction with the advice of a financial professional.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
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