When Raef Lee and I delivered the results of our national survey and presented our whitepaper “The Next Wave of Financial Planning,” we got two types of questions. The first, regarding technology, Raef answered in his Practically Speaking blog post two weeks ago. The others focused mainly on fees. Specifically, our suggestion, that while we don’t hear much today, we look at advisory fees as being at a fork in the road, due to the influence of a more educated client, demands for more transparency, client “validators” and the growth of robo-advisors. The whitepaper suggested that advisors should prepare for a shift when it comes to fees – it looks like that shift is starting sooner than we expected.
When one client asks, are three thinking it?
Earlier this week, I got an email and a call from an advisor asking for some advice about addressing a recent email from one of his clients. The advisor wrote:
“One of my bigger clients, who I charge a flat 50bps fee, was asking why my compensation was based on a percentage of assets. He has no problem paying me for my financial planning advice, which he told me he values greatly. He also knows that he’s getting a good value and that he would probably pay more at another firm. He just doesn’t understand why my comp is asset based, rather than a flat annual fee, and that it increases simply because he rolls over a 401(k) or invests his bonus in his NQ account. His point is that he doesn’t think it takes me any more time to service him when his account is $2.5mm than when it was $2mm.”
So, how would you answer this question from the client? (Go ahead, think about it… I’ll wait.)
Who else does this?
The client was expressing exactly what we have been discussing on these pages for almost four years, and why we made this one of the key takeaways from the whitepaper. A business model of providing comprehensive, real advice around real issues like retirement, estate or risk management that a client truly values, and yet pricing the service in an AUM fee (which the client doesn’t value) doesn’t seem to make sense.
Secondarily, not charging separate planning fees (upfront, before the work is done) can cheapen the value of the advice you deliver anyway. Can you think of any other business that says, “I will do 10 – 20 hours of very valuable work for you, if you promise to buy a separate commoditized product from me later, and as long as you keep paying for that commoditized product, I will keep performing the service you value?”
The nice part about my discussion with the advisor was that he was already looking at changing his fee schedule. In fact, as we talked, I could feel he was actually validating what he had been thinking for a while, versus looking for answers. His notion of a smaller “access fee” or “investment oversight fee” (he was trying out ideas on what to call it) of 25-30bps for his investment services, coupled with financial planning fees and other service fees, were coming out easily, so you could tell this wasn’t the first time he had considered it. In fact, he was toying with creating an almost modular financial planning fee schedule, which would allow clients to practically select from a menu for their planning concerns.
First, understand your value
While the philosophical discussion around fees was good, we had to get to the real world of how to price the advisor’s services. Because many firms are different in their offerings, there are not a lot of benchmarks or industry research on how advisors should price themselves. (There is a ton on what they are doing, but there is no really “gold standard” of what things should cost.) As we talked, we settled on a few ideas to get started.
• Understand and be able to communicate your value proposition. If you can’t clearly articulate what you do and who you do it for, how can you charge for your services? If you cannot communicate your value, why would anyone want to hire you?
• Know your clients. Do you have a niche? Are there other non-investment-related services that your niche needs/wants that you can provide? Even better, can you charge for them? I am not suggesting nickel and diming a client, but if there is a value-add service that you can provide, why not look at it?
• Know what you are worth. Once you know your true value proposition, step back and look at your “hourly rate” (here is an easy way to estimate your hourly rate). If a client is asking you to put in hours of research to solve issues, by knowing your hourly rate, you can more easily justify and communicate your planning fees.
• Know what it costs you to service your client (here is an easy way to estimate your SCPC). How can anyone reasonably come up with pricing for their services, without knowing what it costs to provide those services?
If you build it, will they come?
Obviously, the big question in all of this is: Will the client actually write checks for planning, rather than having a percentage come out of their investment portfolios? If we are not showing real value, the answer will be no. It is my belief, however, that if the client sees value, they will pay. It is also important that the client sees activity other than investment-related ideas. What are those activities? I’m sure you are already doing a bunch of activities and have even more ideas.
11 Most Read IRIS Articles of the Week!
Why Secure Passwords Matter and How to Create Them
10 Ways to Celebrate International Women’s Day
Becoming a Great Podcast Host with Celeste Headlee
New Guiding Principles for Opportunity Zone Investors
Leaders: Do You Challenge Your Status Quo?
9 Marketing Trends That Will Dominate This Year
How To Keep Envy From Destroying Your Workplace
6 Tips to Help Your Journey to Retirement
Who Do You Sell to First
Forward-Looking Investing2 days ago
Moat Investing: Powered by Morningstar
Market Strategist2 days ago
We Are Not Convinced the Market Storm Has Completely Passed
Development2 days ago
Advisors: How To Answer “What Do You Do?”
Markets2 days ago
Higher Mortgage Rates, Student Loans and Nike
Equities3 days ago
7 Stocks That Pay the Largest Dividends of All That Trade on Nasdaq – Or Do They?
Advisor3 days ago
The Wizards of Wall Street vs. The Selbees from Michigan
Markets4 days ago
The Chameleons Are on the Run
Compliance4 days ago
Regulators Focusing on How Firms Identify, Monitor and Test Custody Scenarios With Client Assets