Nancy Lininger spoke with Registered Rep. about how to offer clients fee relief without getting into trouble.
Registered Rep.: Is fee relief a common practice among advisors in recessionary periods?
Nancy Lininger: Well, I wouldn't say it's common. But we're in uncommon times right now. So the question is starting to come to the mind of a lot of advisors for the first time. Advisors are feeling, how can I still charge the same amount of fees when there's been such a huge drop in portfolios?
RR: What should advisors think about when deciding to offer fee relief to their clients?
NL: The first thing they need to do is look at their Form ADV, part II, which is the full disclosure document. If they have done a good job with it, they should have disclosed whether they do or don't negotiate the fee. If they've said that they don't negotiate their fees, they're going to have to send a letter to all clients — whether they want to negotiate with all or just some. Because it is in the client's favor, it's not like it's a new agreement where you have to go get the client's signature. If they've already said they do negotiate the fees, then they have to decide whether they will do it across the board or pick and choose certain clients. You don't want to secretly favor some clients if you have not already provided the necessarily disclosure to all.
RR: What are some of the ways in which advisors can offer fee relief?
NL: Waiving or lowering your minimum flat dollar fees, waiving or lowering the asset minimums to which you apply fee breakpoints and waiving your minimum portfolio size requirements. For instance, maybe the advisor charges 1 percent on assets, but stipulates that the annual minimum fee is $10,000. Now let's say the client used to have a $100,000 portfolio, but the portfolio has now dropped to $80,000. The advisor may opt to waive the $10,000 minimum and charge just the 1 percent instead. Some advisors also negotiate individual breakpoints with clients. An advisor might say, “Tell you what, we're going to quote you 1.5 percent right now, but if you bump your portfolio size up to $1 million, we'll lower it to 1.25 percent.” And let's say the client bumped his portfolio up, and the fee has dropped to that 1.25 percent, but lately the portfolio has fallen back below the $1 million mark. An advisor might decide not to raise the fees he charges on that account back up to 1.5 percent.
RR: Anything else an advisor should consider?
NL: You do not want to refund fees that you've already charged, because you don't want to make it look like you're making up for losses, guaranteeing any returns or making settlements. If you have a complaining client then you need to work through it with the compliance department, your attorney and your E&O insurance carrier.