Last month we began a discussion surrounding advisor fees. That piece started out by asking, “Have you ever raised your fees? If you’re an advisor, probably not.”
Based on our experience consulting with hundreds of financial advisors over the years, we’d assert that many of those outstanding advisors may be undercharging clients. Caveat: As fiduciaries, financial advisors are responsible for doing what’s in their clients’ best interests (and in some cases, raising fees may not be an appropriate choice. Additionally, if you charge a separate fee for financial planning, this discussion may not be applicable for you).
The trend or mindset that’s long been perpetuated in our industry is that advisors should only charge a customary fee of 1% (or lower), especially when they’re first starting out in the business.
Yet, for RIAs who provide comprehensive wealth management/financial planning—plus investment management—charging only 1% on accounts < $1 million may not make sense.
In our experience, it’s common for independent financial advisors/RIAs to charge clients an ALL-INCLUSIVE fee (which covers both financial planning and investment management). Most of these advisors use a sliding scale which starts at 1.5% – 1.25%, with breakpoints at 250k, 500k, and $1 million AUM.
Back in 2017, Michael Kitces wrote about this topic, compiling lots of data and several sources for his article titled “Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?”
In this compelling piece, Kitces states:
“Perhaps most striking, though, is that there’s almost no common consensus or industry standard about how much of an advisor’s AUM fee should really be an investment management fee versus not, despite the common use of a wide range of labels like “financial advisor”, “financial planner”, “wealth manager”, etc.”
Sound confusing? Imagine how all your potential clients out there doing their own research may feel.
That said, here are some best practices about how to determine, then communicate, a higher fee structure to your prospects and clients:
1) Decide whether you’re charging enough.
Ask yourself, “Am I charging enough to both my existing and new clients…:
- “…To maintain healthy margins as I cover my costs of doing business?”
- “…To sustain and adequately invest in my business so that it will continue to thrive for years to come?”
- “…To continuously make improvements to my systems, technology, and client experience?”
You can also do some market research on local competitors who provide a similar caliber and suite of services to what you offer clients. Custodians regularly create white papers and other resources on this topic for your review. Remember to pay attention to what those fees actually include (so it’s an apples-to-apples comparison).
Some advisors choose to survey their clients with a few simple questions about how much value they feel they’re getting from the relationship; their overall satisfaction level; making sure they’re aware of all the areas of service included in their advisor relationship; how likely they would be to recommend their advisor to friends and loved ones, etc. This exercise can be helpful to your fee termination process as well.
Bottom line: Are you charging a fee that represents what you deem your worth as an advisor to be?
2) Figure out how much it costs you to serve each of your current clients.
While you review your fee structure, take your client list into consideration. How much revenue does each client add to your overall cost structure? Is each client profitable? Which client relationships are draining or time-consuming?
Not only does the 80/20 rule likely apply (smaller accounts can take up much more of your time, while requiring a whole other set of maintenance, skills, energy, or customization), RIAs are required to hold themselves to a higher fiduciary standard.
3) Now determine what fee structure will get you to your overall business goals.
By answering these questions, you’ll have a clearer vision for the future of your business…and how your fee structure fits into that vision:
- Overall, what fee structure will allow you to earn what you feel is fair and adequate?
- Does it make sense to raise your fees across the board…to only a handful of existing clients…or will you just introduce a higher fee structure to new clients?
- In an ideal world, what would your AUM be…and how many new clients would you bring on?
4) Get clarity about WHY what you do is so valuable.
As a comprehensive financial planner, you provide a quantifiable list of services to your clients.
But as their trusted advisor, you offer so much more, above and beyond those tangibles:
- You help clients feel a sense of contentment by helping them keep track of their financial affairs.
- You give them the freedom to focus on what—and who—is most important in their lives.
- You prevent them from making the dysfunctional emotional decisions people often make when handling their own investments.
- You earn their trust, walking alongside clients to help them dig deep to identify and prioritize their goals and needs.
- You help clients align their finances with their values.
Keep all of this in mind as you remind yourself of (and perhaps consider taking a new approach to articulating) your value.
5) Clearly communicate your value to clients.
What you do for your clients is unique and highly valuable. It’s crucial not to let your unique message and service offering become commoditized or improperly compared to that of other advisors (who may charge—and do—less than you).
This is where powerful, succinct marketing, messaging, and branding comes in. If you’re able to clearly communicate your value to your clients, they will feel empowered with this information…and lucky to have someone as indispensable as you leading their financial team.
Our firm is committed to helping advisors make their businesses more profitable and efficient through the development and implementation of a customized business plan and strategy which involves outsourcing to our experience back/middle office and practice development team.
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