PRACTICE MANAGEMENT: Telling Clients About Pay--As In, Your Own

Dow Jones

CHICAGO (Dow Jones)--Financial advisers who clearly disclose how they are paid say they are finding more credibility among crisis-tinged consumers.

James Miller in Chapel Hill, N.C., has spent years explaining his firm's fee schedule to prospective clients, including the unconventional policy of charging each client a fixed annual fee. But in the wake of the financial crisis, which revealed the financial industry's unseemly web of conflicts and pay agreements, Miller is seeing a new twist: Many prospects ask first.

"Frankly, I would say one out of every two clients that come in the door say they're thinking of changing advisers because of the compensation model," said Miller, the president of Woodward Financial Advisors Inc. "People are more aware that there are other options out there."

To be fair, Miller's clientele almost certainly isn't average: Chapel Hill is part of North Carolina's Research Triangle, a three-city region full of affluent and educated professionals who might be tempted to comb through the different types of financial advisers and their ways of charging customers. "This particular area is probably more savvy," he concedes.

But the frustrations stirring in Miller's backyard point to a slow-boiling national awakening in which consumer groups and even lawmakers in Washington are talking more about how financial advisers are paid--and whether they adequately explain those arrangements to unsuspecting consumers.

In the Dodd-Frank financial legislation passed last year, Congress gave the Securities and Exchange Commission broad authority to change the rules governing how advisers serve and charge clients. Rather than wait to see new rules, companies across the industry are re-thinking their policies.

UBS AG (UBS, UBSN.VX), for example, is reviewing the fees its financial advisers in and around the U.S. charge to wealth-management clients, according to sources familiar with the matter.

Financial advisers don't exactly have a rich history of using clear English to explain how they make their money. The industry's deepest roots are tied to herds of brokers selling stocks, mutual funds and insurance policies--often with murky disclosures about how they were paid. Even now, the industry is a mish-mash of financial products and licensed professionals that, when taken together, look mostly alike to the unknowing public.

Dave Young knows what that feels like. As a successful entrepreneur in the mid-1980s, he needed investment help. But whenever he asked financial advisers how they were paid, he got confusing or troubling answers.

Now that he owns his own advisory firm, Paragon Wealth Management in Provo, Utah, he broadcasts his fee schedule-- literally. Paragon produced a video for its website describing precisely how, and how much, it charges clients to manage their assets and financial lives.

Young says he just won some new business while showing a prospective client the fees another financial adviser was charging to manage $2.5 million in assets. In the process, Young discovered an obscure layer of fees tied to mutual fund commissions. "He had no idea," said Young of his new client. "That's pretty common, even with savvy investors."

To help the uninitiated, Thomas Ruggie, president of Ruggie Wealth Management in Tavares, Fla., likens his own firm's fee schedule to different American Express charge cards. They are well known for coming in green, gold and platinum versions, each with its separate fees and services.

Some clients sign on for a full slate of wealth-management services. Others settle on a cheaper set of services. Either way, says Ruggie, they know exactly what they are getting and how much they are paying.

"If I were calling in," he explains, "that's what I would want to know."