Firms know many ways to improve profitability, but the one strategy that most advisors hesitate to implement is a fee increase.
Compared with other businesses, the financial advisory profession seems particularly uncomfortable discussing fees. This reluctance has escalated as the profession continues to attract more people with a social worker mindset rather than a broker’s focus on making money. When terms like “life planning” and “peace of mind” enter the value proposition, some advisors find it difficult to assign a dollar value to the outcome.
That doesn’t mean that advisors lack motivation. They just may lack the courage to act on their convictions. The fear of losing clients tops the list of concerns, but next in line is anxiety over what advisors perceive as a difficult conversation. Some advisors choose to avoid this uncomfortable discussion claiming that the recent market lift has accomplished the desired result (assuming their fees are tied to assets under management).
But does your pricing accurately represent your value? The decision to enact a fee increase may require advisors to rethink their own worth. Remember why clients hire you. Your work profoundly impacts individual lives. Like surgery, your work requires a specialized skill set that your clients need. Your work allows people to delegate the stressful and complicated wealth management process to a proven professional. People sought you for your wisdom in the first place, and not because you provided a cheap way for them to invest their money. Accept these fundamental truths so that you can move forward with a pricing strategy that is fair to the client and conducive to your business success.
Three primary considerations should inform your pricing strategy:
For most advisors, the cost of doing business has risen. The primary expenses relate to compliance, recruiting and retaining talent, rent and technology. Compliance processes and supervision not only require continual investment, they also divert advisor time from revenue-generating activities. In addition, as the market has returned so has the talent shortage, elevating the cost of recruiting and retaining talent. Infrastructure costs like rent, leasehold improvements and technology also continue to increase as firms strive to remain current and appealing to both clients and staff.
As for market pricing, in spite of “digital” advisors and discount brokers driving down the price at which individuals can invest, elite firms that deliver more value are raising their fees to clients. They accomplish this through market segmentation or changing the fee brackets to a higher minimum threshold before the basis point charge is reduced.
Advisors are using assorted value levers to raise fees. We see more firms charging consulting fees for specific complex projects, value-based fees for enhanced services and planning fees separate from AUM pricing, especially at the lower end of the client range. Some firms are migrating from a wealth management offering to a multi-family office model where they may charge separately for concierge services or complex tax planning.
Once you have analyzed your costs and determined what your competitors are charging for comparable services, then you can start developing your own pricing strategy.
Generally, the process begins with a segmentation plan. Segmentation is not about rationing service, but rather about understanding the cost of the services you deliver for a price. For example, airlines charge more for business class than they do for economy class because business class provides more leg room, wider seats, better food and early boarding. The greater the value (as perceived by the customer), the more inclined they are to purchase these seats (even if they use mileage upgrades as currency). On the other hand, those who pay less for economy class get cramped seats, a separate food charge and the inconvenience of waiting for the bathroom when beverage carts block the aisle.
Many advisory firms treat all clients equally in terms of service and attention from advisors and staff. In many cases, the large clients essentially subsidize the experience delivered to over-served small clients. Remember: Not all clients are equal and client service should reflect the distinctions. Using the airline model as an example, determine what you will deliver and charge to different client segments.
Avoid segmenting clients based solely on assets under management or revenue. Create at least half a dozen criteria to divide clients into segments. For example, certain clients may warrant simpler investment strategies, less planning time, reduced reporting, reduced access and fewer in-person meetings. To design an effective segmentation strategy, score clients and prospects on each characteristic. Determine how each client fits into your model. Don’t forget to consider whether they are an active advocate, center of influence or ideal client. Determine the client segments, then estimate your cost to service each segment. The higher the score, the higher the service experience, the higher the price. Likewise lower scores receive less service at a lower price.
Be careful not to offer a menu of choices to the prospect. Your discovery process should assess client needs, preparing you to propose the optimal relationship and pricing. Otherwise you run the risk of clients choosing the lower price but demanding the highest level of service—and it’s hard to unwind that type of expectation.
Once your segmentation strategy is clear, follow five critical steps in rolling out the pricing plan:
Create the pricing transition plan. Set a timeframe for the implementation of the new pricing structure, both with new clients (a far less daunting task) and with existing clients. Once the timeframe is agreed upon, assess each of the firm’s clients to determine which clients must be moved to the new structure and by when. Schedule review meetings to ensure that discussions take place within the required timeframe.
Develop a value story. The initial discussions with clients will be the most challenging; advisors must present new pricing in a confident and clear manner. A strong value story supports the effective communication of the pricing structure and should ease uncomfortable moments and uncertainty for advisors and clients. The value story should articulate the tangible and intangible outcomes that the firm achieves for clients.
Communicate your value. The value story will need to be reinforced with clients. A consistent communications plan conveys the value story to clients in a steady manner and supports the pricing discussion.
Plan for client objections. Preparing for potential client objections to the new pricing structure can reduce advisor discomfort. Create a list of likely objections and prepare effective responses that will ease client concerns. The firm’s advisors should work together to develop strong responses and arm themselves with the necessary discussion points.
Tracking implementation. The new pricing structure must remain front-of-mind throughout the implementation period. Tracking client conversions to the new structure will support the firm in better forecasting revenue and profitability. Depending upon the number of clients a firm services and the number of advisors, full implementation could take up to 18 months, with new clients commencing immediately and existing clients following.
In reality, pricing only becomes an issue in the absence of consumer-perceived value. Therefore it is critical not only to generate a return over and above your costs, but to demonstrate to clients that what you do is as good as or superior to what others are offering.