Recently, I wrote an article in Advisor Perspectives which basically said there seems to be no rhyme or reason to the way advisors are pricing their services. This firm charges one amount, another charges something very different, yet they both do similar kinds of work in much the same way. Brokerage firms will charge more for mass-produced, canned planning advice than independent planning shops do for more detailed, customized financial guidance. It seems that many advisors were deliberately discounting their fees for no clear reason. I said in the article that I was pretty sure Adam Smith's invisible hand wasn't intended to work that way. (You can see the full article here: http://advisorperspectives.com/newsletters12/Why_Are_Advisory_Fees_Lower_Than_They_Have_To_Be.php)
In response to that article, Cheryl Johnson, who practices in Medford, OR, made an interesting point. She said that she and other colleagues charge lower fees because, essentially, some clients are drawing their living from investable assets in a volatile market environment. When she sets her fees, she takes into account an estimate of how much her clients would make above what they've paid her, and she wonders how they could live on those returns if the markets behave in the future as they have in the past.
As she put it: "we aren't in Kansas anymore, Toto."
This raises a great (and surprisingly subtle) point about why the price-setting process is different for advisors than for any other profession.
Different how? I think most of us, when we visit a doctor, don't expect him/her to charge less-wealthy patients less than more prosperous ones. I have never yet had a doctor examine my finances before deciding whether I can afford the office visit. The same with attorneys. The same with plumbers.
Uniquely among all these professionals, financial planners are in a position to be able to assess what their customers/clients can afford to pay them, and you conduct this evaluation as a matter of professional routine. The key question that Johnson is raising here is fairly simple on the surface: when you have this information, what do you do with it? Do you decide that Client A has more than enough set aside to reach his goals, and can afford your full fee, but Client B, who is living close to the edge of success/failure, should get a discount? More broadly, do you decide to charge only what clients can comfortably afford? If you do, what formula would you apply to that consideration?
I think this opens up a very interesting discussion in the profession. Any professional management textbook would say that you should ignore this "customized affordability" information. But realistically, if you're sensitive, and if you are concerned about your clients' welfare, how can you? Depending on how you look at it, this added information either provides a powerful distraction to the normally straightforward process of charging for your services, or (alternatively) it gives you much more data on how and what to charge your customers/clients. It can either be distracting or relevant.
I have never heard anybody raise this subtle point about the planning profession's fee structure, and yet I suspect that all of you are aware of it on some level. Now that the issue is on the table, we can talk about it, and perhaps the wisdom of the professional crowd to give us guidance on how to either ignore the affordability of your fees, or take this data into account and boldly move away from the way that all other professionals charge for their services. Either conclusion, I think, would be interesting.