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Practice Management > Compensation and Fees

Don’t Be an Underpriced Advisor

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Are you underpricing your services as an advisor? The smart money says you are.

“Price is driven far more by the advisor than by market forces, and many advisors are pricing well below achievable norms,” according to Price-Metrix President and CEO Doug Trott. “It’s like car brands—advisors have the power to choose to be a premium advisor or an average advisor. If you want to be a premium advisor, price in a premium fashion.”

A research report called “Big Fish” from Toronto-based PriceMetrix has uncovered a huge price gap for North American advisors doing the same kind of work—as much as 100 basis points.

Other takeaways from the recently released report:

  • Big Fish, defined as households with $2 million or more invested with a financial advisor, exhibit some price sensitivity but aggressive discounting does not appeal to them. They want a fair price, not necessarily a low price. Put another way, high-net-worth households are value-sensitive, not price-sensitive. Notably, the top-ranked quality clients look for in an advisor is a relationship based on trust. They rank price almost last.
  • To attract high-net-worth clients, one needs to make room for them. The analysis showed that the larger the proportion of small households (those with less than $250,000 in assets), the smaller the number of high-net-worth households. PriceMetrix suggests keeping the lid on small households at less than 40% of one’s client base. Notably, only 3% of the time did a household with under $500,000 in assets grow into a high-net-worth client with the same advisor. Or, as the report bluntly puts it: “HNW clients are hunted, not farmed.”
  • There is essentially no going rate for high-net-worth households. The data show that the market will support several price points. In fact, the difference between the highest and lowest quartiles of pricing is 80 to 100 basis points.

While the compensation conversation can be tricky, interviews with industry experts suggest that advisors increasingly are talking to clients about how they are paid.

John Anderson, managing director and head of practice management for SEI Advisor Network in Oaks, Pa., calls advisor compensation “the elephant in the room.” Advisors, he adds, are being asked by clients to do more than ever—yet they aren’t pricing their services accordingly.

That could be changing. Anderson, who has worked in financial services for 30 years, says he has heard more talk in recent months from advisors about what they are charging than ever before.

“They are asking: ‘How am I doing? I’m charging 1%. Is it high? Is it low? What’s the right number?’ And with the market reaching an all-time high, clients are paying more at 15,000 than they did at 10,000. Post-Madoff, people are looking at the value of the financial advisor,” he says. “They’re paying attention to fees.”

The ‘Right’ Number

Advisors won’t be able to figure out what to appropriately charge a client until they can articulate just what it is they do and the cost of the services they provide.

Anderson’s back-of-the-napkin exercise for determining your service cost per client: First, figure out your estimated average hourly rate. As an example, gross revenue of $250,000 based on 50 working weeks per year at five days per week and seven working hours per day amounts to $142.86 an hour. Next, tally your service cost per client by adding up your hourly cost, administrative costs and overhead for each client meeting or touch. The result will show you what you need to charge to break even.

“Frankly, what I’m spending a lot of time talking about is telling advisors to step back and examine the value they provide. When you can do that, the client truly values the relationship with the advisor, with the planner,” says Anderson. “Yet we charge them on how much money they have. We are teaching the client that the investment is the important thing, not the client. Advice is our stock and trade yet we charge X, based on a commodity. There’s a disconnect.”

The more progressive advisors, according to Anderson, are charging a fee for advice along with an investment fee of no more than 50 basis points on assets under management. The planning fee might range from $20,000 a year for a baby boomer couple with complex finances to $2,000 a year for a Gen X couple with a simple lifestyle.

But Anderson continues to see resistance among advisors who want to stick with same-old, same-old.

“I talked to a planning firm last week that gives away planning for free. You’re telling me you are a planning firm but you only charge on the investments? It’s crazy,” he says.

New Pricing

The overall trend toward transparency is encouraging advisors to talk fees—some firms too.

“The best advisors aren’t alarmed by this; they encourage the discussion,” says Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y. Some of the independent firms are also separating “manufacturing” costs such as an outside money manager’s fee from advisory costs so that clients know exactly what they are paying.

One of the biggest challenges the industry faces—particularly in the brokerage world—is the creation of new pricing plans. “Clients are demanding it and the industry needs to figure it out,” he adds.

Trending now is the Merrill Lynch One platform, announced in July. Simply put, it combines five managed account platforms into one. Sarch says many advisors don’t like the model because it discourages discretionary discounting.

“Let’s say you have $500,000 with me and I see you as a wonderful center of influence. You deserve the discount. They don’t see it that way. The way they see it is that I am undercharging and when I do that, they are going to take it out of my paycheck,” says Sarch.

Trott, however, calls Merrill Lynch One “novel” and “attractive” and “a powerful change” that will be mimicked by other firms. “It’s a move toward household-based pricing and away from product. It satisfies something that clients and advisors have asked for, for a long time,” he notes. “As you see more transparency to what the end-client is paying, it will put pressure on firms to simplify.”

He also discourages “sympathy pricing” in a market downturn because it hurts business over the long run in addition to short-term losses. PriceMetrix research shows that only 5% of advisors who cut prices are able to fully recover when the market moves back up.

One Advisor’s Story

Certified financial planner Mike Carey, a first vice president with Cassaday & Co. in McLean, Va., knows about underpricing his services. He was charging 25 to 35 basis points on fees and commissions when the industry standard was 125.

“I was way under market. I dug myself a hole,” says Carey, who has $100 million in assets under management. “It was great for clients, not so great for me.”

He said he had to do some soul searching before changing his model to an assets-under-management business. “Am I really worth this? It’s that old Catholic guilt. It’s O.K. to make money, I told myself. You’re not doing anything wrong by making money. I had to convince myself—and I did.”

The conversations with clients weren’t always easy.

“It’s difficult to say: ‘I’ve been charging you X and now I’m going to charge you X for the very same services.’ The response typically is: ‘Okay, then I assume the returns are going to be that much better to justify that extra cost.’ The answer, of course, is no, they are not.”

Only two clients bailed when Carey instituted what amounted to a four- to five-fold increase in fees.

“All the client wants to know is: How much am I paying you? Then the client can determine whether that’s a fair amount or not,” he says. “If you make things transparent, as in quarterly reports, it’s there in black and white. We’re all hung up about is it going to be too much or not enough? I was my own worst enemy.”


Returning to Prosperity

New research from FA Insight shows that independent advisory firms posted double-digit growth in assets under management last year and the highest level of profitability since the Tacoma, Wash., firm began tracking data in 2008.

 “The 2013 FA Insight Study of Advisory Firms: People and Pay,” released in September, said that while resurgent equity markets deserve a share of the credit for the turnaround, financial performance indicators point also to disciplined management.

Among the highlights:

  • While pay continues to ratchet up for lead advisors, the fastest growing segment is support and associate advisors. “Firms are becoming more conscious of the need to develop a new generation of advisor,” notes Dan Inveen, principal. “One, you’re able to provide a career path for these advisors and, two, as the scarcity of lead advisors continues, firms are looking for ways to better leverage the time of these experienced advisors.” Between 2009 and 2013, lead advisor pay rose at a compounded annual average growth rate of 1.3% versus 2.4% for associate advisors and 3.2% for support advisors.
  • While 56% of firms offered incentive compensation to their professionals in 2009, the share dropped to 52% by 2013. Many firms view incentive pay as an additional expense rather than an effective way to boost individual performance.
  • Team-based firms outperform their peers in a variety of ways. They are faster growing, more profitable and team members are more productive. In fact, they grew revenue at an annual rate 50% greater than their peers. —EU


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