How much do you charge your clients? What is the right price to put on your services? With competition fierce—and clients more informed than ever—it’s important to make sure that you are not selling yourself short. In fact, you may not be charging enough for your services.
It sounds odd, but most firms don’t analyze their pricing schedule when establishing fees for a new client, or when considering changes to their business model. Or so says the new report, Pricing Strategies for Maximum Success, commissioned by Schwab Institutional and executed by the consulting firm Moss Adams.
This lack of self-examination could come back to bite advisors, mostly through underpricing of their advice. “The issue is that advisors have two forces of evil conspiring against them: clients want more for the same fee and costs are rising,” says Mark Tibergien, a principal with Moss Adams and author of the report. “To restore profitability, advisors need to either change their approach to pricing or increase prices,” he says.
When you’re doing your annual practice evaluation, Tibergien says advisors need to do some basic assessments:
- Cost of servicing the client: Perhaps, most obviously, pricing must reflect the cost of service. For example, a firm with 200 clients, overhead of $400,000 and professional compensation of $600,000 would have an average cost per client of $5,000 ($1,000,000/200 = $5,000). A new relationship would have to contribute at least $5,000 in revenue to break even. Get rid of the ones that don’t at least break even.
- Competition: Pricing strategy must be developed with competitors’ prices in mind (obviously, price is a significant part of a prospect’s decision to work with one advisor over another). Check out ADV forms of competitors. Are you above, below or in-line with the competition’s pricing?
- Value Proposition: Prices must be aligned with the value advisors deliver to clients. If clients perceive that an advisor’s contribution to their financial lives is as great, or significantly greater, than the price they pay to the advisors, they will be satisfied with the fee.
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Advisor fees fall within a wide range, according to the Financial Planning Association’s (FPA’s) 2004 report, Financial Performance Study of Financial Advisory Practices. The median fee on a typical $1 million account is 79 basis points, but 5 percent of firms charged more than 125 basis points, the high end of the fee range, and 2 percent charged less than 25 basis points, the low end.
Mark Little, owner of Wall Street Services, a San Antonio-based RIA, knows firsthand how important pricing is when building a practice; but, he says, he learned late. In 1999 he was working six days a week with a practice that had grown to more than 1,000 clients, many worth less than $50,000, and was generating $388,000 in production mostly by transactions. So he pared back his practice to 91 wealthy clients, setting a $1 million asset minimum and an asset-based fee of between 0.75 percent and 1.2 percent. To make sure his wealthy clients understood that he wasn’t just raising prices, but also the level of service, he was careful to tell them exactly what they’d be getting for their money, what he called his “10 Deliverables.”
How he revamped his traditional brokerage practice into a wealth management machine has a lot to do with figuring out the value of his services. “Every deliverable we provide we first see if we can afford, so we do the math,” he says, analyzing time and hard costs, as well as resources needed to provide it. The minimum fee of $11,500 was calculated to ensure he’d be able to continue his lifestyle, pay his four staff members, as well as the taxes on the business and fund his future goals—his own financial plan, he says. “You’d be surprised how many advisors I speak to haven’t done this,” he says.
Asset-based fees are the norm for most RIAs, but minimum fees are underused. While 89 percent of advisors use asset-based fees, only 60 percent use minimum fees, according to the FPA’s study. Interestingly, the top 10 percent of firms (in terms of profitability) “all strictly adhered to a minimum fee requirement,” says the study.
Dan Moisand, a principal with Spraker Fitzgerald Tamayo & Moisand in Melbourne, Fla., says he doesn’t have a minimum fee, but charges a 1 percent annual fee on a minimum asset size of $500,000, the equivalent of a $5,000 annual fee. For those special exceptions to his asset minimum—relatives of clients, for instance—services are simply scaled back, or the client is asked to handle some of the administrative costs the firm would normally take on. The report calls this “service level segmentation,” and says it’s “a valuable client management process that every firm should consider.” Says Moisand: “We don’t require that each client be profitable, but we’re aware of the costs in each relationship,” he says.
Some firms also charge an additional fee for financial planning work, sometimes in the form of an upfront charge or bundled into the asset-based fee over time. According to the report, this fee makes sense, given “the amount of time spent on a client is typically front-loaded.” It also forces clients to decide if their situation is complex enough to justify the expense, says the report. Besides setting up a financial plan, this fee covers the significant time spent on paperwork, account setup, client education, etc. According to the study, 35 percent of advisors charge such a fee.
John Wortman, one of six advisors at Valeo Financial Advisors, a fee-only RIA in Carmel, Ind., is one such advisor. But Valeo’s pricing structure is unique in its design—it nurtures smaller clients instead of excluding them. For clients that don’t meet the $500,000 asset minimum, they pay an upfront fee of $2,500 to $5,000 for basic financial planning services. They are also asked to make a $500 annual charitable contribution to Valeo Financial Advisors Endowment Fund, the firm’s donor-advised fund. “You can’t just let these smaller clients go to the competition,” says Wortman. “For instance, the small business owner who’s growing 100 percent a year, but whose entire net worth is tied up in the business. Is that someone you let go?” he asks. “No way. If and when he wants to transition that business somehow, we’re here for him.”
For the firm’s 200 high-net-worth clients, a quarterly fee is charged, not as a percentage of assets, but based on their net worth (0.1 percent on the first $2.5 million; .05 percent on the next $2.5 million; and .025 percent on net worth exceeding $5 million). He says the pricing structure should be kept simple and upfront for clients (the firm’s fee schedule and full form ADV are available on its Web site). “The more a la carte you get with pricing, the more you have to calculate—you’re better off getting close and running with it or you won’t be adding value for your clients,” says Wortman. “We’d rather deliver more and charge less.”
Tibergien says the report is not meant to suggest spending every moment calculating profitability, but advisors need to be aware of factors affecting margins, especially given the environment of rising costs and demands from clients. “You wouldn’t wing it with your client’s financial plan, why would you do it with your business?” asks Tibergien. “Look at your gross margins—if they’ve been going down in the past three years, you have to ask why,” he says. “And after you look at cost per client, the competitive environment and your value proposition, you need to ask, ‘Should I be adjusting my prices?’ ”