Just this past week, two very different events made me realize that there are still unanswered questions in the profession. This time the questions are about a very touchy subject: the fees you charge your clients.
Last week, an advisor I've known for a long time asked me what other people were charging for their advisory services. After talking with local advisors, he realized that his fees were considerably lower than others in the market, and he was wondering whether the profession was moving toward a standard fee structure.
He also asked me if there was a good way to tell clients that you're going to be raising their fees.
I responded by sending an article that I had written some years back. It doesn't answer the question, but it does suggest that advisors are deliberately undercharging for their services. In fact, I suspect that virtually everybody reading this e-column could raise your fees and create more sustainability and scale in your firm, and your clients wouldn't blink. The biggest obstacle is in your own mind, rather than in your clients'.
But here's where it gets interesting. Last night, I had a long conversation over dinner with George Gay, of First Affirmative Financial Network in Colorado Springs–the leading figure in the environmental, sustainability and governance world (formerly known as socially-responsible investing). In the conversation, he talked about advisors who charge roughly 1% of a client's AUM for managing portfolios, and those who charge roughly 1% of a client's AUM for managing portfolios plus doing a lot of planning work.
There is actually a broad spectrum. Most people who manage client assets will do some kind of assessment of the client's financial situation on the front-end, so there is a real question as to when you cross the fuzzy line and are doing "real" financial planning. That would be a fascinating topic to explore (where IS that line?), but for now George's point–and I agree–is that some people are working much harder for that 1% than others. And, of course, some people do a lot more asset management work than others as well. In George's world, navigating client preferences for investing in the companies they want to support, and avoiding those who they believe to be harming our society or environment for profit, is not a simple or straightforward activity.
Suppose we lined up every advisor, side-by-side, along a spectrum. At the left end, you have a fairly large number of advisors who create buy-and-hold portfolios of index funds, send out performance statements four times a year and do little to no analysis or planning work. Many of them don't own any planning software.
Moving across thousands of advisors to the far right end of the spectrum, you have a relatively smaller number of people who do a lot of rigorous planning work for their clients, including cash flow analysis, net worth statements, goal sufficiency evaluations, in-depth conversations about their future goals and objectives–plus ongoing planning advice as a virtual life coach, plus monitoring the investment portfolio in ways which require a lot of work and hopefully some value in the end.
If we assume that everybody in our hypothetical lineup charges roughly the same AUM fee, then there is a huge discrepancy in revenue-per-hours-worked between the firms on the left side and the right side of this spectrum. And there is a comparably huge difference in the consumer's value received per dollar spent on the planning relationship.
But to the public, the people on either end of the spectrum (and everybody in the middle) appears to provide essentially the same service. Even the profession doesn't make fine distinctions. Everybody on that spectrum is vaguely referred to as a financial planner or investment advisor.
Suddenly, the question of "How much should I charge?" starts to look extremely complicated.
So once again I'm seeking the wisdom of the crowd. I'm trying to figure out: what is an appropriate, fair fee to charge clients for the services that are provided along this broad spectrum? It seems to me that one thing is settled: the best, most expedient way to bill those fees is out of client portfolios quarterly.
Beyond that, though, should planning and asset management work be bundled under one overall fee? (Does that encourage clients to think that planning work is free?)
Or should there be an upfront fee for the initial planning work (if there is any), a quarterly retainer fee for the ongoing planning work (if there is any), and a quarterly fee (either retainer or AUM-based) for the asset management work? If so, how much for each, and does it depend on the extent and quality of the work?
If you could do it all over again, what would your fee structure look like, ideally?
And finally, all of you know that you have unprofitable clients, people who are demanding more service than they're paying for under their current arrangement. That may be because they are below your normal AUM minimums, or in some cases they may have more AUM than any other client, but you're spending far more of your time on their case and circumstances than anybody else's.
It makes business sense to raise their fees. But you've been putting it off, some of you for decades. For those of you who have bitten this bullet, can you tell us: What is the best way to have a conversation about raising client fees?
And if you're the lowest-cost provider in town, what is the best way to have a conversation about raising everybody's fees?
And maybe one last question: should the profession be doing a better job of making the consuming public aware of this spectrum, these potentially huge differences in value per dollar spent? Or is it better to let the marketplace sort this out?
I'd like to get a LOT of participation to these important unanswered questions. I know some of you are shy about lending your thoughts, while others are busy. If you could find the time to type out a quick answer to any of these questions (just a quick answer, if that's all you have time for), I'd be grateful, and if you don't want me to include your name in the final article, just say so and I'll comply with your wishes.
Thanks for your help as we think this through.
Insider's Forum conference
September 17-19, Dallas, TX