by Patrick Brewer, CPA, CFA
How your firm prices its services is about more than just boosting profit margins. The right fee structure is vital to client satisfaction and your long-term success.
Fees have always been a hot topic in this industry. However, with trading commissions getting slashed to zero, the rise of passive managers and price pressures across the board, many advisors are rethinking the way they price their services.
Even if your firm’s current fee structure seems ideal, it’s good to know your options.
The six most common ways financial advisors price their services
1. Assets under management
Assets under management (AUM) has always been popular for its scalability and the way it compensates firms for increasing account values. That said, when the market falls, firms that utilize AUM need to work harder (more case work, more client interactions) even though they’re making less. The model also doesn’t lend itself well to complex clients with less assets to manage, like business owners. Finally, AUM presents a potential conflict of interest because advisors are dis-incented from certain recommendations, such as purchasing annuities or paying down a mortgage.
Charging a commission is another popular fee structure, especially among firms that specialize in working with retirees or business owners. Commissions can supplement your income while you continue to acquire other clients. However, many clients prefer fee-only planners and will ignore any services that involve commissions.
Charging hourly looks great on paper, because you get compensated for all the time you spend working with a client. Many professional firms, like lawyers, charge hourly rates, but this structure can prevent you from leveraging your time. It can also limit how much you’re able to help your clients. If a client is only willing to pay for X hours, you can’t do work that falls outside that budget without compromising on your fee. Most advisors are focused on doing the right thing for the client, even if that means taking a hit to the bottom line. That’s why the hourly pricing model often falls apart in practice.
4. Charging per project
Charging on per-project basis gives you more control over the scope of work. It also helps you secure the clients who like to know, upfront, how much they’re going to be charged for the results they want. Per-project fees can also be worked into the sales process before a client commits to wealth management. This gives them the opportunity to test-drive your services.
5. Net worth plus assets
This is another example of a fee structure that makes a lot of sense in theory – but can fall apart in practice. Calculating and assessing a client’s net worth can be complicated enough, but with this model, you must also establish exactly how much credit you deserve for future net worth growth. This can quickly make the relationship contentious.
6. Retainer agreements
Finally, you can charge monthly, quarterly, or annual retainers. Clients with household incomes of at least $300,000 tend to prefer retainers. Many advisors love them, too, because they can count on making the same amount each month. On the flip side, a client could pay your retainer for a few months, then move on once they’re satisfied you’ve taught them enough.
What pricing model works best?
There’s no magic formula for pricing. However, the best place to start is with prioritizing flexibility.
Why? Because the more flexible you are, the more clients you can serve. A rigid commitment to a certain pricing structure can cross entire client segments off your prospect list. This is one of the main reasons some financial advisors erroneously conclude that there aren’t enough clients for them to serve.
There are enough clients for everyone. However, insisting on a single pricing structure caps your growth potential. That’s why my RIA firm, SurePath Wealth, doesn’t utilize one single approach to pricing. We decide which model to use after we’ve assessed the needs of each client.
For example, an owner of a health supplement company came to us for help with setting up a retirement savings plan, and for a comprehensive review of business and personal insurance. He reinvests heavily into his company, and his investable assets outside the business are small. In this situation, a straight AUM fee wouldn’t reflect the value of the service delivered. So, we might consider a retainer, a project-based fee, or a commission if insurance products are needed.
On the other hand, a couple in their mid-50s may need retirement-planning advice and help with their investments. Most of their net worth is concentrated in retirement accounts, and they have an expectation of paying an AUM fee. In this situation, an AUM fee (plus, perhaps, a one-time fee for a comprehensive financial plan) might be best. Using this approach requires analysis before we take on a new client, but it gives us the flexibility to meeet the client’s needs – and remain profitable.
Leveraging your firm’s specialties
Speaking of serving our clients, that’s where we take a page out of a venture capital (VC) firm’s handbook. Successful VC firms have “boutique” specialties (clean tech, biotech, data security, etc.) After choosing a focus, they employ specialists who understand the finer points of these markets. This level of specialization is a huge competitive advantage. So, while my firm serves multiple client types, I employ specialists who understand each client type at a deep level. This is vital in assessing if a potential client will make for a good investment. It’s also a boon when serving them.
For advisors who are just starting out, stick to one niche. Establish yourself there, expand later. Use a pricing model that combines a retainer with an AUM fee for additional flexibility. And remember: Taking on an unprofitable client today in hopes of making that money back later is a losing proposition. Your business model must be sustainable from the ground up.
Patrick Brewer, CPA, CFA is the founder and a partner at SurePath Wealth, co-founder of Brewer Consulting, and host of “The Model FA” podcast.