Are You Outrageously Expensive or Too Cheap?

The price is right

There’s a lot of discussion around what is the ‘right’ way to charge for Financial Planning services.

I get it. We’re at another inflection point in the development of our profession, and it’s right to question everything, including how your business charges.

You need to be positioning your business for where things are headed in the next ten years, not where we’ve come from in the last ten.

In light of that, I believe the charging conversation needs to be done in context; that is, considered in conjunction with the services being provided and the value being delivered. That sort of goes without saying, but in most of the industry commentary I see, there are lots of words written and spoken about the price of advice, but almost nothing about the other side of the ledger: what’s actually being delivered.

What’s your price?

When it comes to pricing here are a few questions to consider:

• Is your service expensive if you charge 0.5% of assets under management?
• Is your service expensive if you charge 1% of assets under management?
• Is your service expensive if you charge a flat fee?

Clearly the answer is, “It depends”.

An awful lot of financial advisers basically do portfolio management for clients. If they were charging me 0.5% p.a. of my invested assets for that I’d think they were expensive. Most of the online investment options would fall into this category for me too; expensive for what’s being done.

I also know some advisers that charge 1% p.a. on a client’s investable assets, who are doing nothing more than portfolio management. That’s getting into outrageously expensive territory for me.

Why is that outrageous? Because it’s not a very value-added task.

On the other side of the coin, if you’re a genuine Financial Planning firm, and you provide a lot more than just portfolio management, then it’s possible you are too cheap at 1% p.a.

The same could apply if you charge a big fat flat fee to clients.

What do you do for your clients?

Here are a range of services that I’ve seen and heard about during my career:

• Helping a client define their life goals
• Holding clients accountable to their life goals
• Cashflow modelling – which probably underpins many of the other services on this list
• Education planning and funding
• Investment advice:
  • Portfolio design
  • Portfolio management
  • Behavioural finance support (i.e. stopping clients from doing dumb things at the wrong time)
• Tax planning
• Risk management
  • Life insurance
  • Income Protection insurance
  • Critical Illness insurance
  • Private health insurance
  • Partnership insurance
  • Key person insurance
• Budgeting
• Debt consolidation
• Mortgage advice
• One-page Financial Scorecard reporting
• Social security assistance
• Planning for parents of clients and aged care
• Planning for clients and aged care
• Estate planning
  • Wills
  • Lasting Powers of Attorney
  • Trusts
  • Inheritance tax planning
• Special needs planning
  • Trusts
  • Funding
  • Social security assistance
  • Care
• Charitable giving/philanthropy
• Business succession planning
• Career counselling
• Share options planning

Hat tip to Bob Veres at Inside Information for some of the services on this list. I’m sure there are more services you deliver or have seen delivered to clients.

What do you provide from this list for your current level of fees?

How do you feel about your pricing now? Are you expensive? Great value? Or too cheap?

Special delivery

Just listing a bunch of services doesn’t allow us to evaluate the quality or depth of those services delivered by different firms. However, ‘what’ a firm provides is at least a starting point for a better understanding of how price and value intersect.

Your package of services, when looked at in their entirety, are often called your ‘value proposition’ and with good reason.

A value proposition at its core delivers two key outcomes for your clients:

1. Peace of mind – knowing that everything is going to be alright and that a competent team of professionals has your back.
2. Tangible value in cash – the quantifiable wins that come from reducing costs, saving tax, or assisting a client to claim all the benefits they are legally entitled to.

The first outcome, peace of mind, is more valuable to clients by a factor of 10 in my opinion.

However, the second is also important, especially when your fees can be in the thousands or tens of thousands per year.

What do you do?

I had dinner with a senior industry executive recently who made the comment that they wouldn’t pay an adviser £8,000 a year for the next 60 years to manage their money. They’ve got a point. However, they would be happy to pay for the specific advice that might also add value from time to time (other services from the list shown above).

One might expect an industry insider, who is more comfortable with sorting their own investment management, to make this comment. But we then went on to discuss why most clients may or may not simply elect to buy a Vanguard LifeStrategy® fund or some other low-cost equivalent.

What’s my point?

If you’re going to explain and defend your premium pricing, and I think you can for certain clients, then you have to get clear on what you do for your money, and be able to explain how it adds value to clients before they use your service.

That’s the tricky bit. Services are intangible; a client may not really understand how good your service is and how valuable it is, until they’ve purchased it and used it for several years.

Not only that, but you’ll need to be able to explain clearly and simply to clients the difference between your services and those of your competitors. That’s also tricky, because to the casual observer all advisers look like they are doing the same thing.

It also raises the question: is there an alternative business model to the premium priced offerings we see from most good Financial Planning firms, who are used to serving the at-retirement market?

I think there is. We just need to start thinking more creatively, and many firms already are.

What’s the next step for your business?

“You need to be positioning your business for where things are headed in the next 10 years, not where we’ve come from in the last 10.”