Several months of populist outrage over the sins of Wall Street have stunned the financial community. With every action comes a louder reaction. The proposed 90% tax on bonuses paid to executives employed by TARP-recipient companies was the ultimate expression of rage that could throw sand in the gears of the firms that received capital infusions and the economy in general. At a time when the market is seeking leadership and direction, people in power keep changing the rules and searching for demons. This is scaring even the innocent and those who want to help.
As cathartic as it may be to lash out at everybody who has ever touched a stock, a bond, a loan, or a lien, if the torch-and-pitchfork crowd goes after financial services companies for all their perceived and real transgressions, the rest of us may end up with our own Marie Antoinette moment.
For readers who are saying “that will never happen,” be aware that Barney Frank, Rush Limbaugh, and legions of other bloviators are seeking the heads of anyone who may have contributed to the decline in our nation’s economic well being. Soon there will be no one left to blame. Who is to say that advisors who oversaw client portfolios that declined 30%, 40%, or more are not going to get their public skewering as well?
Hope as we might that President Obama’s counsel to channel anger into productive solutions will take root, I fear we have entered another “McCarthy Era” featuring incrimination by association. This is not to defend bad decisions and acts of malfeasance by regulators, business executives, and financial product manufacturers, but to urge caution against unpleasant unintended consequences of our anger.
We know clients are feeling this rage as well, perhaps out of hopelessness or fear.
For example, advisors have been relating how some clients are demanding that they not be assessed an asset management fee on the cash that is held out of the market. This is a real value perception problem.
How will this changing dynamic influence your business decisions?
Assuming this dialectical spiral will touch retail advisors eventually, advisors need to justify their own worth. Consider two key touch points:
What do you charge the end client?
What do you pay yourself and others within your advisory firm?
Clearly, the two questions are linked. If the advisory firm is under pressure to reduce or eliminate certain fees, how will you structure payments to yourself and your staff? Even more importantly, how much will you be able to afford to pay them?
In these times advisors really earn their keep. Part of their responsibility is knowing when to move assets in and out of asset classes and when to keep liquid. If a client doesn’t think that his advisor is doing his job by keeping substantial portions of client assets in cash, the advisor himself may not have done enough to demonstrate his value in good times. Especially disturbing for financial planners who also manage portfolios, this perception suggests that the rest of what you do is “not worth it.” Further, it implies that the client believes he is buying a product and that you should be paid by transaction–much like a commission–rather than seeing you as advising him holistically on his total financial life.
Aside from this shocking development, advisors will also have to justify how they can command high AUM-based fees in a negative or low return environment. Should you charge a separate fee for financial and estate planning, special needs analysis, or college funding? If your clients value their attorney or CPA as hourly-rate advice providers, is that the next logical step in your pricing strategy? Will you have to distinguish between the planning and the implementation process in terms of how you generate revenue?
My goal with these questions is to disturb you enough to think about your value proposition. Can you define it, measure it, and assign a value to it? Can you benchmark it to comparable professional services?
Many clients may need to be resold on your services and convinced that you are worth their investment in the relationship. There are three elements to a pricing strategy: 1) cost to deliver the service; 2) market value of comparable services; and 3) value of what you deliver. If you can clearly articulate your proposition in a way that clients value, you will have a more sustainable business.