Financial advisors are underselling their services, typically discounting their fees—and needlessly so, according to a new whitepaper by Pusateri Consulting and Training, which specializes in helping advisory firms price their value.
The paper, the first in a series, is titled “Pricing Your Value Unapologetically” and explains some of the difficulties advisors have in setting their price.
The report’s author, Pusateri managing director Giles Kavanagh, cites research by behavioral economist Amos Tversky that found consumers will pay a premium for certainty while discounting uncertainty.
Advisors run into trouble because investment advice is an intangible service with an uncertain outcome. Writes Kavanagh: “To counterbalance the uncertainty of investments, advisors need to be reminded that they can effectively promise a certain client experience—a rigorous process and service standards.”
The unique nature of each client relationship, with some clients wanting more attention than others; the lack of competitive pricing data; and a public barraged with a confusing array of advice offerings, some of which explicitly question the integrity and cost of their competitors’ offerings, all contribute to doubt about the advisor’s price.
As important as these factors are, the Pusateri paper argues that it is advisors themselves who sabotage their pricing integrity through behaviors such as discounting even in the absence of client requests; pricing at low levels as a means of preemptively avoiding contentious fee discussions; and varying fee arrangements with different clients.
Presenting data showing a 127 basis-point gap between the top and bottom quartile of advisor fees on $250,000 to $500,000 accounts, the Pusateri paper asks: “Are the top quartile advisors providing more than double the value as the bottom-quartile pricers?”
To the contrary, the paper asserts that low-priced providers often offer superior service (and vice versa), and that the lowest-quartile pricers may not be adequately pricing the risk they and their firms assume in managing the accounts.
To all these problems, the paper recommends adhering to standards of fairness, consistency and transparency as a means of setting fees. It defines fairness as “exchanging value for fees where the value delivered is either equal to, or exceeds, the fees charged,” and cites the medical profession as an example of a field in which outcomes are uncertain but where it is understood that “clients or patients are paying for expertise and judgment.”
As for consistency, the Pusateri paper offers an unnerving test: “If your clients were gathered at a cocktail party and decided to compare the fees that they pay you, would you feel comfortable?” While allowing for non-uniform pricing where it can be defended on the basis of varying levels of service, the paper asserts that “price consistency simply means that for the same levels of value provided, you charge a consistent fee.”
Public skepticism about Wall Street in the wake of the recent financial crisis makes transparency, the third key element in pricing integrity, of paramount value, yet, “to date, we have not seen any U.S. or Canadian brokerage firm boldly set pricing transparency standards, nor articulate them to the marketplace,” the Pusateri paper asserts.
Promising to elaborate on a framework for establishing pricing integrity in the future, Kavanagh concludes that advisors would do well to make price discipline a priority, seeing little downside and significant upside in doing so. “Paradoxically, correcting and clarifying pricing with clients actually reinvigorates the client’s perception of the advisors value,” he writes.
Check out the second part of this two-part series, Are You Charging Enough for Your Services? Use This Tool to Find Out, on AdvisorOne.