RIAs: Are You Charging Enough?
TD Ameritrade's Vanessa Oligino tells ThinkAdvisor what advisors can do if they think they're undercharging.
As RIAs work to grow their businesses, they often consider many possible strategies to achieve that goal, but a review of their pricing policies to make sure they’re adequately charging for their services all too often gets overlooked, according to Vanessa Oligino, director of business performance solutions at TD Ameritrade.
Too many advisors are either undercharging for their services or giving away at least some of their services for free, she told ThinkAdvisor in a phone interview.
AUM-Based Pricing
One common mistake RIAs make is that they base their fees entirely on the size of the clients’ assets, she pointed out. Although assets under management pricing is the “predominant” model used by advisors and can work for clients with huge portfolios, many RIAs are finding that their ability to provide complex financial advice and guidance to a wider audience of clients profitably can be challenging, she said.
One major flaw of the AUM-based pricing model, as the 2008 financial crisis showed, is that it’s “vulnerable to market swings,” according to Oligino. Although AUM-based pricing works for many RIAs, “alternate strategies can give advisors greater ability to have more control over margins and growth rates [and] they also may be able help advisors better communicate the value they deliver to clients and prospects,” she noted.
Using solely the AUM pricing model means that advisors end up often doing the same amount of work for two clients, but end up being paid much more by one of those clients than the other solely because of account size, she pointed out.
Meanwhile, “as advisors are looking to work more with younger, Gen X clients [and] older millennials … they’re finding that this pricing model that has served them well for a really long time is becoming more challenging,” she told ThinkAdvisor. After all, younger clients “just haven’t amassed the same amount of wealth yet” as their older clients, she said.
Minimum Fees
One pricing strategy that “we find is the easiest for advisors to implement is the minimum fee,” she said, noting that “really helps to protect on the downside,” when the market takes a significant turn and clients’ assets take a big hit.
For example, if an advisor implements a minimum fee of $5,000, then any portfolio that’s generating revenue over $5,000 would not be subject to the minimum fee, she noted. “But, if for some reason, the revenue generated off the portfolio is less than $5,000, then that client would have to make up that difference,” she explained.
RIAs typically set a minimum fee of $5,000 “across the board,” she said. But there are some firms that decide to set a minimum fee of $10,000 or $12,000 instead. “Only the firm can decide … what the value of the work is,” and it varies based on the organization, she noted.
Special Project Fees
Implementing a flat-rate special project fee is another pricing strategy that RIAs should consider, she went on to say.
Sometimes clients, particularly those with a high net worth, will ask if an advisor can work with their estate attorney or accountant on a special project, and the advisor agrees to do that, without realizing it’s often not just an hour or two of work, but 10-15 hours of work instead, she said.
“And they’ve basically done it for free because they didn’t charge anything extra” to the client if they’re just using the AUM pricing model, she pointed out.
A Checklist
When reviewing pricing, which should be done at least every couple of years, “one of the things that we highly recommend is that [advisors] understand what their cost to serve is” first, she said. “Once you understand what that cost to serve is, you understand what your break-even point is.” And then the advisor must factor in his or her desired profit margin and “that leads you to that minimum that you’d like to make working with that type of client” and then enables the advisor to set a minimum fee to achieve that, she noted.
It’s also best to figure out who the advisor’s high-maintenance, low-maintenance and typical clients are. “You don’t need to” raise pricing on all clients, she said.
An advisor can also opt to “grandfather in” existing clients and just charge new customers the higher fee, she noted, adding new customers won’t be experiencing a pricing change, so “that’s the easiest way to go about it.”
How to Raise Your Fees
An advisor may then need to have a conversation with clients that he or she is losing money on and explain what type of work they’re doing for the clients and note that the cost to do that work is higher than what they are being charged, so the price must increase, she explained.
“In many cases, clients are fine with that,” she said, adding: “If you’re able to articulate the value that you’re providing to them and they agree — they are satisfied, they enjoy the relationship they have, they’re getting value out of it, they think that you are helping them achieve their goals — many people will not even blink at the pricing increase. As long as it’s reasonable.”
Advisors must, however, prepare for that conversation. No advisor should go into a pricing conversation cold — especially with an existing client, Oligino said.
RIAs must also make sure their team members are brought in to discuss any new pricing strategy plans. “Sometimes we find with advisory firms, if they have three or four lead advisors, they all sort of have a different philosophy of when they’re raising fees or when they’re holding the line on pricing, [so] you need to make sure” that the firm has consistent pricing across its advisors, she said.
If there’s a change in pricing, advisors need to update their firm’s billing system and marketing material, she pointed out. “Then you roll it out,” have conversations with clients and “you need to sort of toe the line to make sure that you realize the benefits of the pricing change that you had hoped” for, she said.
Challenge No. 1
The “main challenge” that Oligino sees advisors grapple with when it comes to price increases is that they “think the conversations are going to be more difficult than they actually are,” she said.
But, in cases where advisors have showcased the value that they provide and the clients agree with that, those clients are “invested in that relationship just as much as the advisor is,” she explained.
Advisors often expect that the conversation about a price increase will be difficult and clients will refuse to pay the higher fee, but “that’s really not the case,” she said, adding: “We see almost no difference in attrition rates with firms who have a pricing increase and those who stay where they are status quo … Clients are not leaving because advisory firms are increasing prices.”
That might be different if the increase was significant. But RIAs can only raise prices so much, after all, she said, noting: “They still have to answer to the SEC,” which demands that fees be “reasonable” and advisors must be “very transparent about the fees that they’re charging and for what.” Advisors can’t double what they were charging last year to make more money. “That’s just not allowed in our industry,” Oligino said.
Oligino also talks to a lot of advisors who do a lot of pro bono work “just because they’re good people and they’re really customer/client service-oriented,” she said.
“They should do pro bono work — but do it with military families or increasing financial literacy across the U.S. — things like that,” she stressed, adding: “You don’t need to be doing pro bono work for ultra-high net worth clients.”
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