Whether your starting out as a Financial Adviser or you’ve been at it for a while, one of things that you’ve no doubt debated over and over is how best to price your services. The options available are numerous, and the opinions about which ones are best are varied and divided.

So the question is which option is the best and which one should you implement in your business. While I have fairly firm opinions I’m going to try and give a balanced assessment of your options so that you can weigh up the options and make a choice that right for you.

From the outset I just want to make an important point. If you think that you can’t implement a new pricing method because clients won’t pay for advice then you’re wrong. Don’t assume what clients will or won’t pay, just ask them and chances are you’ll be pleasantly surprise. There is one caveat to this. You need to be able to show that whatever your fee is and however it is charged, you can demonstrate that the client will get value for money. Show them what services and benefits they’ll get and if the value is there, chances are they’ll be happy to pay. If they start arguing the toss on fees they’re probably not worth having, but that’s a discussion for another day. I’ve seen examples of clients paying what I consider extortionate  fees because their adviser was able to clearly map out his ‘value’ to the client.

So what are your options:

Product Based Commissions

This is traditionally the go to way for Financial Advisers to get paid. In years gone by almost all advisers where paid this way and it was just the done thing. However pressure is growing on this option as regulators across the globe look to stop this option as they push to increase professionalism within the industry.

On the positive side it’s easy and it’s simple as the client doesn’t feel like they are paying anything (although we know they are), and your income stream is coming from a large reliable institution so there’s no fear of not being paid. However that’s about as good as it get. Unfortunately there are more cons than pros when it comes to Product Based Commissions.

On the negative side your fees are generally limited and dictated to you by the product provider. Yes you might have some flexibility to increase or decrease fees but your options are limited. There’s also the underlying suspicion (real or perceived) that your advice will be biased to maximise your revenue, rather than provide the clients with the best option for them. This type of revenue stream might also unconsciously impact on the advice that you give to clients. For example, it might be in a clients best interest to use a lump sum of cash to pay off their debt, however as there is no commission in this you might instead recommend that they invest in a mutual fund.

Percentage of Funds Under Management

This option is the natural progression of the ‘Product Based Commissions’ option. Like a commission it is a percentage based fee levied on the amount of funds under management/advice (FUM).

The advantages of this option are that the fees in this case are un-bundled from the overall product fees so there is more transparency for the client. In effect they can clearly see what they are paying. In addition there is far more flexibility over the level of the fees that you can charge. In my experience, when advisers switch from commissions to FUM based fees, their fees increase by 20%-50% with little to no push back from clients.

This structure also allows you to include (at your discretion) client assets that might no ordinarily pay product based commissions such as property, cash etc but over which you provide advice.

On the downside it carries the same issues over real or perceived conflicts of interest that commissions have.  In addition you’re tying your fees, and therefore your value, to one of the few parts of the process that you have little to no control over i.e. market returns. Yes when markets go up your revenue increase, but when they go down, so to does your revenue. When revenue goes down you still need to provide the same level of service (and you could argue even more, to help placate nervous clients) for less money, which is not a great outcome.

In addition, clients might be lead to believe that because your fees are tied to investment performance, when markets fall its your fault and therefore they should be compensated for your failure. If you don’t clearly set expectations at the beginning of your relationship with your clients this can be a very real problem.

Hourly Rate

With a move towards professionalism, there becomes the opportunity to adopt fee structures used by other professionals such as lawyers and accounts.

The obvious option is to charge an hourly rate for your services. This way you can work out what you want to earn and work backwards to set an hourly rate. You don’t need to sell product to generate income, you can focus on advice which is where the majority of your value comes from anyway. Clients are also happy because they’re only paying when you’re working on their account.

While there are some downsides to this structure, they aren’t insurmountable. First of all clients might think that you’ll take your time on tasks, curry out unnecessary tasks or just bill for task not completed just to generate some extra revenue. However if you clearly layout the services that you’ll provide and rough estimates of the likely times to undertake these task, this should put these concerns to rest. Especially if you call a client to warn them if you’re undertaking unexpected tasks on their account.

The second issue relates to calculating your hourly rate. While I said that you can work out what you want to earn and then work backwards to an hourly rate, it’s not quite that simple. This is because you can’t bill all the time. You need to take time out for ongoing education, marketing, managing the business and many other day to day tasks. You need to take all of this into consideration when your calculating your hourly rate.

The other downside is that this type of option effectively puts a hard limit on your earnings potential. After all there are only 24 hours in a day, 7 days in a week and 52 weeks in a year. Therefore the amount you can earn is limited as you can’t bill for time that doesn’t exist.

Fixed Fee For Service

The fixed fee for service solution effectively works to overcome some of the issues for your clients, while putting a little bit of the risk relating to time management back on you.  Under this scenario you determine what your services you’re going to provide your clients, then you place a fixed fee on this service.

One of the major advantages of this fee structure is that you have a lot of flexibility over how you price your service. You might workout roughly how much time it will take to supply the defined services, then apply an hourly rate to get a fixed price. Alternatively you can derive a price based on the value that you think the client will get from the service. Either way, the price that you charge is clearly backed up by a service offering so its clear to the clients what they are paying for.

This structure is also very conducive to  providing advice to individuals with little to no savings. Under a Commission or FUM arrangement clients might desperately need and benefit from advice but with little to invest they aren’t worth the effort. Under a Fixed Fee scenario they may be prepared to pay the fee and you can give them the advice that makes a massive difference to their situation.

On the downside, this scenario is also somewhat limiting to your income. There will only be some many clients that you can take on board and therefore only so much income that you can generate.

Also because the fee is put in front of the client right from the beginning, some clients might balk at signing on. You need to be able to justify your fees with a service agreement and in some cases it would help to explain that they are likely to pay the same or under different fees structures that look smaller upfront, but do add up over time.

Value Based Fees

I’ve come across this option once before and the advisers where making huge fees off the back of their advice. Not only where their fees massive, but they very rarely had a client say no. In fact less than 1 in 50 clients walked away from paying upfront fees in excess of $20k.

Essentially the advisers would prepare their advice, and model the outcomes to show how the client benefited. They then charge a fee based on the value that they were generating for the clients. This was a win win as the clients where benefiting from the advice and the adviser was being financially rewarded for the benefits they were generating.

While this allows you to potentially generate large fees there is a lot of work that needs to happen to model the outcomes to determine the overall value provided. Also while models are helpful, over the longer term their accuracy is questionable and clients can be left with expectations of outcomes that might not materialise as modeled.  This can leave clients feeling rip-off over time which is not an ideal outcome when you’re trying to hold onto clients for ongoing service arrangements.

Combination of Options

Many advisers that I’ve worked with over time have tended to adopt a combination of the above options to help get the balance right in their businesses. Again as their is no right or wrong option you can mix and match any of these options until you get a structure that suits you and, just as importantly your clients.

Summary

In summary, there are a number of options available to you, and what works for others might not be right for you. If your comfortable with what your charging and you can justify your fee structure then your all set to maximise the revenue you can generate.

Have we missed anything? If you think there are other options please let us know and we’ll add them to our analysis.

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