If you don’t know where to start the compensation discussion, try these conversation starters.
1. Ask your client, “Do you remember how you paid your real estate agent or lawyer when you bought your last property?”
Most adults know the difference between how a real estate agent and lawyer are paid. Real estate agents earn a commission on the houses they sell/bid on successfully, and a lawyer (generally) charges by the hour. Relating the differences in compensation styles to careers most people have encountered directly helps your client grasp the concept.
2. Ask your client, “Do you know how interest rates work on your credit card?”
If a client neglects to pay off his credit card in full, he’ll pay interest on a predetermined percentage of that bill’s outstanding total. This is similar to paying an advisor a percentage of his AUM. The percentage is predetermined, but the amount may fluctuate depending on the size of the account. Once the client grasps the concept, don’t neglect to point out your rates are far lower than what most credit cards charge.
3. Ask your client, “Did you ever rent movies? Do you ever borrow from the library?”
Late fees for movie rentals and library materials are similar to redemption fees for closing a mutual fund account early. The video store, the library and the fund company want you to hold on to the product for the predetermined amount of time. Straying from the agreement can be costly for customers.