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Proper Fee Disclosure in a Financial Planning Meeting

By Taylor Liao, CFP

“The pessimist sees the difficulty in every opportunity; the optimist sees the opportunity in every difficulty.” – Sir Winston Churchill

There isn’t regulation in Taiwan enforcing financial planners to disclose the commission they receive from vendors of products. Neighboring countries such as Australia and Singapore do have regulation to enforce disclosure, and if Taiwanese clients knew this discrepancy, they would likely feel like they were being treated unfairly. Meanwhile, the financial planning profession is not well-recognized by the public, therefore fee-only business models don’t exist and I doubt that a financial planning firm could succeed with this model. As Churchill’s quote from above states, there is an opportunity to develop the financial planning profession in Taiwan.

Product Selection Based on Client’s Best Interest

A few months ago I bought a HTC mobile phone. It worked fine except the operation speed became quite slow after I used it for a couple days. When I wanted to open several applications such as Facebook and Google Mail, it would freeze up for one or two minutes. I went to the service center for help and the engineer told me that the built-in memory of this model was only 512 megabytes, noting that the amount of memory was not enough to run the software smoothly for a business user like me. He suggested I change to another mobile phone with one gigabyte of memory. So, I sold the old one and bought a second-hand HTC mobile phone at half the price of the original, and it had only been used for three months. My new phone doesn’t have any problem running the programs I need it to.

I learned from this experience that HTC is a reliable manufacturer of mobile phones. They have to develop a variety of models for each market segment; some with lower specifications and prices, and some with better specifications and higher prices.

I think that this experience is similar to financial planning. When a financial planner is providing a product solution to their client, they know the details of the financial product such as function, advantages and disadvantages. The client doesn’t have complete information to judge which financial product is the best fit for them. It is our responsibility to explain the necessary details of products to clients, and this will consequently help us avoid complaints in the future.

Some Clients Don’t Need Financial Products

Have you ever encountered a client whose case was very straight-forward? For example, they needed budget control or their salary was just enough to cover their current situation, but not enough to help further their future goals, or the client has the perfect arrangement to meet their goals, and all they need is reassurance from you. In these examples, the client doesn’t need products and it is up to the planner to honestly tell them this. Confucius said, “a noble man makes his wealth in ethical means”. This should be applied to our profession: our value is that we are a trustworthy and objective source of information. Financial planning is not simply a medium to sell products.

Fee Disclosure

The first question asked by clients in a financial planning meeting is, “What do you charge?” Financial planners’ answers vary from, “Oh, it changes”, “It depends on the item that you choose to plan for”, “We will charge based on the labor hours and manpower that we have to spend”, “We can’t answer that question until we’ve had our first meeting and gathered data.”

These vague responses must be upsetting to hear for the client. From a financial planner’s perspective, I understand why fees aren’t disclosed right away. Planners’ need to know what type of client they are dealing with before they can choose a fee structure. For example, a high-net worth client with complicated planning requires more effort whereas a middle income client with simple problems requires less effort. It is reasonable to charge clients with complicated situations more money but do you have a standard fee structure for normal cases?

Is Financial Planning Enjoyable for the Client? 

Michael Kitces wrote a blog called, Is The Financial Planning Process Actually An Enjoyable Experience? In this blog he says “The inspiration for today’s blog post comes from a tweet from the 2011 FPA Retreat conference – a comment utterly by Dr. David Lazenby of ScenarioNow who said, “Why do we make financial planning like a dental visit, math class, and marriage therapy combined?”

Is it true that the financial planning process is like a dental visit? One way in which this could be true is if a planner dominates the conversation and doesn’t listen to the client. Often, financial planners ask their clients to be “financially naked” and tell us everything about their financials. This question can make them feel uncomfortable, just like being at the dentist. It’s not fair that we ask clients to tell us all the information that we need, and then when it’s our turn, we don’t disclose all the information that they need.

When they ask for our fees, we say “Well, that’s depends on how difficult your case is.” Are we treating our clients like “clients” or like “patients” in a dental clinic?

When my firm works with clients, we separate fee compensation into two parts: basic planning and advanced planning. The basic includes data gathering, data analysis, plan review, product recommendations, and a fixed price for basic planning that we set together. Advanced planning covers optional planning that the client might need, such as estate planning, retirement planning, investment planning, analysis of insurance policy, plan implementation …etc. We have a list of these items prepared and a fee that is associated with each item. The two item exceptions are estate planning and plan implementation. Next to these items, we state “The fee charged will be based on the labor hours and manpower that are needed to accomplish the task.” So, when talking about fees with clients, we show the client agreement with the fee table attached to it. Our clients say that they feel comfortable knowing that they understand how they are being charged for our services.

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