From the May 2010 issue of Research Magazine • Subscribe!

What's Your Advice Worth

Charging the right price is a crucial yet delicate task.

With the advisory role expanding and profit margins shrinking, industry chatter has turned to a touchy topic: the advisor's price tag.

As Dennis Gallant, president of GDC Research, frames it: "Advisors are doing more and more for their clients. Yet we think advisors still aren't charging enough as they add services -- and that's a concern. When portfolios are down, there's a reluctance to go to the client. It's a huge dilemma for a lot of advisors who say: I'm doing more for my client but I don't dare ask for more money."

Indeed, a report from GDC Research and Practical Perspectives revealed that most advisors do not plan to seek additional compensation over the next three years. And that's on top of an industry-wide inertia that has resulted in this little factoid: Most fee-based advisors haven't adjusted their pricing structure in years -- even decades.

At Schwab Advisor Services, Gabriel Garcia, managing director of business consulting, says that half if not more of the engagements he is currently involved in with advisors are connected to what he calls the client experience: notably pricing, profit structure and accountability.

"The economic environment of the last 18 months has really shined a light on the client experience. It's not that clients are looking at fees with more scrutiny. It's the relationship. They're asking more of their advisors than they had in the past with respect to level of engagement, level of resources and frequency of interaction," observes Garcia.

In discussions with one advisory firm, in business 23 years, Garcia asked the principals whether they had added capacity and skill sets over that period. Their reply: "Absolutely." When asked whether they had raised fees to legacy clients who have been with them from the start, the answer was no. "These are fees that date back to a different business model, yet there's this hesitancy to talk about fees and price," Garcia notes.

The market meltdown, which saw AUM fees plummet 40 percent, triggered some rethinking about how advisors are paid. The upshot: Most advisors are sticking with their AUM fee of roughly 1 percent but some are adding project fees or financial planning fees of $3,000 to $5,000 for work invested at the front end. Others are asking higher fees of new clients. And, as the market moves to its new normal, many advisors aren't doing anything at all.

Philip Palaveev, president of Fusion Advisor Network, wonders whether they should.

"It may sound controversial but I would ask: Do you really need to do anything? Collectively advisors, especially fee-based advisors, made a promise to clients that we're going to take care of them and be on the same side of the table with them. We certainly benefit in good times from that equation," says Palaveev. "Outside of some very obvious measures -- making sure you're as efficient as possible, not servicing relationships that are not a good fit for you -- outside of that I would say suck it up."

Historically, he adds, advisors have not competed on price and size. As he puts it: "In a restaurant, it's clear what differentiates the deluxe steak from the hamburger. What advisors do is mystery meat."

Further, he says, clients -- who typically do not understand the multiple costs of being invested with an advisor -- tend not to price shop for advice. "It's a professional service. Generally speaking, people don't price shop for a surgeon or a dentist," according to Palaveev. "Lower price generally means lower quality."

Interestingly, the only place where there appears to be any fee pressure is at the high end of the marketplace. Brian Holmes, who heads Los Angeles-based Signature Estate & Investment Advisors, said perhaps 5 percent of his clients asked for wiggle room on fees during the market collapse. "We've never had it happen before," says Holmes, whose firm had $1.5 billion in assets under management at the end of last year. "I had one client who said 'I'm asking this of my gardener, asking it of my lawyer and now I'm asking it of you.' It was happening enough we had to formulate a response."

The firm's response: a firm no -- with an explanation of all the additional services the client benefits from outside the fee charged for traditional investment management.

Stephanie Bogan, president and CEO of Quantuvis Consulting, says advisors often get into trouble with prospective clients when they essentially discount their services in order to win new assets.

"They're going in for the close. There's that need to win business at all costs, that 'Here's our fee -- but for you' mentality," she notes. "And they're doing themselves a disservice. The underlying issue is that they're always talking about the value they add to clients but they lack confidence about that value when they're trying to get someone to say yes or no. It's all about how you position yourself. Products go on sale, services do not. I've never seen an ad for a lawyer's office that says: Normally $300 an hour, this week $250."

Strategic Pricing

The surest way out of a profitability squeeze is to raise fees or improve operational efficiencies -- or both. First, experts say, it's essential to conduct a self-inventory.

"You have to have that conversation internally," Garcia suggests. Among the talking points: Whom do we serve best? Who is our target client? What is it their needs demand of us? Next: What is the cost to deliver those services? Is it appropriate to segment clients in the delivery of service and experience -- and might it not be wise to segment pricing as well?

After that, examine your fee schedule closely. "I have clients who have made all these exceptions along the way. In one $700,000 practice, the difference between the fee schedule and the discounts was $220,000," says Bogan. "That's unacceptable."

Also, critically analyze how many clients would have to "run screaming from the building" in the event of a fee increase. In one situation, Bogan helped two reluctant advisors to raise their fees. "They were very nervous about it -- nervous underscored, exclamation point. And they literally had clients say to them: 'I wondered when this was coming.' They didn't lose a client," she said.

Advisors also need to clearly communicate why they are raising fees -- and attach it to the additional value the client is receiving as a result.

"Being able to articulate your value is critical whether you're defending your current fee level, or explaining it to a new client, or explaining why you're increasing your fees," says consultant Matthew McGinness, president of Best Practice Research. As an example, explain how you've reinvested in your firm through new hires and services. New offerings like business coaching and behavioral profiling come with embedded costs. Or maybe a new business model has forced changes. "Connect it back with how that impacts the client's fees," he says. "You've got to be able to explain value along with pricing."

Before rolling out any pricing change, Garcia suggests creating a small focus group of clients with whom you have a special connection. The objective: valuable feedback on how to communicate and implement your pricing strategy. In one situation recently, a client of 18 years told his advisor that the pricing change -- in this case a hike in the AUM fee -- made sense but that it would be easier to accept if implemented over a period of four quarters. The advisor complied.

Garcia says it typically takes six months or so of pre-planning to get it right when it comes to raising fees. As for commissions, experts say they don't play a major role in the compensation conversation because they are dictated by the product manufacturer. "Even in the wirehouse world, these commission-based businesses are mostly variable annuities and some alternative investments like REITs," observes Palaveev. "On the commission side, advisors don't control the commission."

When it comes to improving operational efficiencies, Palaveev says advisors should ask themselves: What's my client service process? Is it well-defined, optimal and efficient? What tasks do I need to customize and what do I need to standardize? Do I have the right people executing? Are we scrutinizing waste when it comes to wasting time, resources and delivery? And, he adds, make clients a part of the process by asking: Is this valuable to you? "A lot of firms are providing services clients don't necessarily care about," according to Palaveev.

Outsourcing ongoing operations -- such as reporting, rebalancing, compliance, even marketing -- can also be a game changer, according to Mark Matson, founder of Matson Money, a Cincinnati-based coaching and advisory firm whose 500-plus advisors manage over $2.3 billion.

Twenty years ago, the average fee for assets under management was 1.5 percent; it's 1 percent today. On top of that, expenses have gone up. Fifteen years ago, advisors were taking home 75 percent of their pay, according to Matson. Today, even at $100 million in AUM, it's close to 25 percent.

Outsourcing, he says, can pull that number back up to 75 percent.

Post-recession, Gallant says that more advisors are set on reinventing themselves by offering even more advice.

"Clients are coming out with greater needs, not fewer needs. Before they go too far down the path, advisors need to make sure they get compensated for what they do. While confidence is coming back, there's still this reluctance to give yourself a pay raise," he adds. "As advisors add or reaffirm services, they need to do the math. If you don't want to charge more right now, when will you charge? Just don't set the bar too low."

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One Team's Tale

Up until the turn-of-the-century tech wreck hit, Ballou Plum Wealth Advisors principal Lynn Ballou thought she and partner Marilyn Plum had the perfect practice.

"We were so busy doing transactions for clients we were slowly but surely getting away from our core belief: investing from the point of view of a CFP," says Ballou, whose LPL affiliate in Lafayette, Calif. has $170 million in assets under management. "We realized we were spread too thin. We weren't doing our best work. We weren't saying yes to the right business and worse, we weren't saying no to the wrong business."

In 2003, the two partners hired Stephanie Bogan, who heads Quantuvis Consulting, to help them reengineer their business model and restructure their fee schedule.

The short story: They found another home for clients who weren't the right fit, reducing that number from 400 to 170 -- a number they hope to whittle to as few as 50. As for their fee schedule, Ballou says they adopted it "crying, whining, kicking and screaming" but they had no choice because they were barely breaking even. No wonder, she adds, when they were spending up to 100 hours on a financial plan and not charging for it.

Today, they have a sliding scale -- charging, for example, $5,000 for a plan for clients with a net worth of $1 million to $2.5 million. "You have to think about affordability," Ballou says. They also raised their AUM fee -- but loyal and long-term clients got the opportunity to ease into the new fee schedule.

"The right clients were thrilled. They were actually relieved. I think they felt we lacked clarity in how they were paying us," notes Ballou. "Marilyn and I probably would have parted ways if we hadn't done this. A lot of our frustration was with each other. When you don't know why you're screwing up it's easy to look at your partner and say: 'It's you.' We're crummy businesspeople. We're good financial advisors. And as we continue to rebrand and rethink, we're stunned at how much better our lives have become."

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