Everyone likes a bargain, so it’s not surprising that some financial advisors think the best way to successfully build a client base is to charge the lowest fee possible. But being a low-cost provider can be expensive in the long run—for the advisor. “Advisors don’t always consider the downsides to charging the lowest possible fees,” cautions John Comer, founder and principal of Minneapolis-based Comer Consulting, a marketing consulting firm that specializes in working with financial advisors. And those downsides, such as attracting the wrong type of client or reducing your flexibility down the road, can wreak havoc on your practice.
Consider your clients
There are many advisors out there and everyone’s looking for a way to set themselves apart. Offering clients the lowest rate is one way to do that, but it may not be the best way to stand out from the crowd. “There’s a danger that if you charge the lowest rate, then you’ll be seen as the lowest-rate provider,” says Comer. Depending on your target client base, that may be an advantage—or a disadvantage.
Comer recommends avoiding a fee-centric approach altogether by focusing on the other advantages you can offer your clients instead. For instance, you could try positioning yourself as offering superior service or specialized knowledge in a particular field. If you feel you need to keep fees front and center, just remember that charging a higher fee might actually be a positive for certain clients. As Comer notes, “Not everybody wants to shop at Neiman Marcus, but those that do don’t complain about it costing more.”
Raising fees is part of doing business, as your practice grows and your expenses rise. But those advisors who have built their businesses around having the lowest-possible fees may find it more difficult to raise prices. “Those advisors are probably going to get much more resistance from their client base,” Comer warns. Meanwhile, advisors who have centered their practice around other qualities are likely to have a lot more flexibility when it comes to setting and raising their fees.
Even so, advisors who have been in practice for years may find themselves under-charging clients because they want to avoid a difficult conversation about money. In Comer’s experience, their fears are misplaced. He cites the example of one advisor he worked with who hadn’t raised his fees in a number of years. When he finally did, only two out of his 120 clients complained, and both of them ended up staying on as clients. “He also had a number of clients who said, ‘It’s about time!’” Comer says.
Comer’s advice: re-evaluate your fee structure at least every three years to make sure you are getting paid appropriately—sooner if your practice goes through significant changes. “Clients don’t tend to be as price-conscious as advisors think,” Comer says. “Especially once you’ve been working with them for a while, and they’ve seen how valuable you can be.”