Finding the right fee structure seems to be a constant struggle for some advisors. They weigh the pros and cons of different fiduciary fee options trying to find the right pricing model or combination of models, but never arrive at a solution that makes them entirely happy. Are you spending too much energy on what fees you should be charging?
On this episode of the Elementality podcast, Reese Harper and Chad Jardine examine the different pricing models most often used by fiduciaries (retainer, AUM, hourly). They look at the pros and cons of each and discuss why you need to also focus on your value proposition, which can be a really difficult stumbling block on its own. The good news is once your value proposition is set, it may help you recognize the best price for your services.
Podcast Transcript
Reese Harper:
Client doesn’t really know why they would pay more, or why they would pay a certain amount or why they should pay anything, because the advisor isn’t scoping their value out real clearly. And then the advisors also kind of struggling to know if what they’re committing to is the right thing, because they don’t exactly know what it’s going to cost to serve as a customer.
Jordan Haynes:
Welcome to Elementality. I’m Jordan Haynes, financial planning specialist to Elements. In this episode of Elementality, Reese and Chad, talk about the establishing fees for advice. And while before determining a pricing model, advisers should establish what that service offering will actually be, and its cost for delivery. Which will naturally increase the advisor’s confidence in their business, and reduce clients confusion because they understand what they’re actually paying for. As you listen, consider your current pricing model and whether it’s an accurate reflection of your service offering and your value. Enjoy the episode.
Reese Harper:
Welcome to Elementality podcast, everybody. I’m your host Reese Harper here with Chad, “The Dad” and Ted in the studio. Excited for another episode, we each week prepare either a critical question, problem or topic that we’ve run into in our adviser community, and kind of share our perspective on it. Chad, what is the topic of this week?
Chad Jardine:
Well, I just have to comment on, I really appreciated the carnival barker nature of your welcome today. I think you’re in find forums, I mean our guests or our audience is really in for a treat. I can already tell you,
Reese Harper:
I have a jacket on.
Chad Jardine:
I haven’t even asked the questions and already I’m getting fortunate forecasts, lucky charms.
Chad Jardine:
It’s exciting. Exciting topic to cover today. I think this is something that everybody has to face. If you’re in business doing this work, you have to encounter that. And so, what we’re talking about is pricing models, mechanisms for charging the client…
Reese Harper:
Love it.
Chad Jardine:
…in the way that has the right kind of alignment. I think that sometimes it can be… In fact, we hear this right? We can hear it. It’s confusing and difficult to understand how to make sure that the client values, what you’re doing in a way that makes toward in that exchange where they give you money, you give them planning and advice and whatever other services. And how do you make that transaction work where the client always leaves feeling like they got the better deal?
Reese Harper:
Yeah. Well, this is a… Dude, I’m stoked about this one. I actually have some really cool insights on this from this mornings, a couple of calls I was on this morning. And mostly because I learned something really important this week, I think about pricing, and I already knew a little bit, having run through a bunch of different pricing models.
Reese Harper:
First thing we’ll just agree on, everyone here that is listening should know that we think… What we’re talking about is different than price tied to product. So if you’re, we think the commission-based transactions are going to continue to die, as it relates to professional financial advice. Okay?
Chad Jardine:
You see it, because there’s kind of an inherent conflict of interest. [crosstalk 00:03:21].
Reese Harper:
Yeah. It doesn’t mean they’re going to go away completely. But I think for people who want to position themselves in the kind of future of where wealth management and financial planning is going, like the customer perceives that as a conflict, and the customer actually perceives that as less professional, and that’s not going to change. So, we’re going to talk today about the… It doesn’t mean that you’re a bad person if you’re receiving fees in that scenario right now, but obviously there’s a place for it. It is a business models that I hope continue to thrive in a commission-based environment. Similar to, in fact, I think, real estate agents still have a place and mortgage brokers still have a place to get compensated that way. These are… Commissions don’t inherently mean you’re working with someone who’s unethical. It just means that the customer is going to perceive that as a conflict to getting holistic, broad, thoughtful advice.
Reese Harper:
So, all the fee models we’re going to discuss today probably have more to do with being perceived as an advisor, not being perceived as someone who’s doing any transaction-based work.
Chad Jardine:
Yeah. That makes sense.
Reese Harper:
So, just want to set that stage. First principle, we’re going to talk about the difference… or I would like to at least voice that there’s percentage-based fees for AUM, right? You can get paid as percentage. You can get paid in fixed fees, whether that’s a monthly retainer, a fixed annual minimum, an hourly rate, or some combination of both of these, those are really your only two options. You can have fixed fees that are hourly or flat or monthly retainer, or you can have AUM. Either an exclusive take on one or the other, comes with a certain set of challenges.
Reese Harper:
And I just wanted to basically, I wanted to highlight what I learned this week, that was so interesting to me. Which was, I’ve been doing a lot of consulting with different financial advisers on their fee models, just as a side project of Elements growing so fast, because one of the first questions that comes in, once people adopt the system is like, Well, how are you billing? How are you doing that as advisors, how are you doing it, acquire…
Chad Jardine:
Yeah. That makes sense.
Reese Harper:
… what are your fee structures? And, I find that advisors obsess over fee structure way more than they think about their value proposition.
Chad Jardine:
Interesting.
Reese Harper:
They think about fees more than they think about what they’re doing for clients. And, what that tells me is that, if an advisors… I went to some advisor’s websites after I talked to them. And it’s interesting, you’ll see on some websites, fees are a big part of either the front page, or a main call to action on the site. Like I’m a fixed fee advisor, I’m a flat fee advisor or it’s completely absent, or sometimes it’s not even transparent. It varies, but a lot… To make my first point here. A lot of times, that the advisor is kind of focused on fees as a differentiator. And I just feel like that’s going to be a big challenge if they’re leading with that.
Chad Jardine:
What’s the… Yeah. Tell me more about the… What’s the competitive angle in that, just always lower? Always my fees are less?
Reese Harper:
Well, I think for the… Yeah. No one’s leading. I think my fees are more transparent, might be what I’m seeing. I’m a fixed fee advisor. You see, I see that a lot, like…
Chad Jardine:
You’re just positioning against commission based.
Reese Harper:
Positioning against commission-based or positioning against AUM. Right? I don’t charge on assets under management, I only charge on a fixed fee basis. I’m not going to…
Chad Jardine:
Oh I see.
Reese Harper:
… charge a percentage against your account. And what I kind of find interesting about that is, a lot of energy get spent around the fees, but not as much energy gets spent around the value proposition. And so, I talked to the advisor and they’re like, “Yeah, I don’t know if I could, I could do an AUM based business, because all my clients, they’re really tuned into this fixed fee thing.” And I’m like, “Well, your website is talking about the fixed fee thing, all over the place.” Like, what do…
Chad Jardine:
That might have something to do with the clients expectations.
Reese Harper:
It might have something to do with the client’s expectations that you’re setting, or many of my clients… I wonder if they would be okay, going to fixed fee, the website has all this value proposition around how AUM is the best pricing model, because it incentivizes the advisor to align with the client, so they can grow their assets together.
Chad Jardine:
The AUM model seems to have this kind of built in… The better you’re doing, the better I do. And how do you… Is that important to address in the fixed fee model?
Reese Harper:
Well, before we get to the merits of each of those fees, which to answer your question, I just wanted to make sure my points really clear here at the beginning. Which is, if your value proposition, if you don’t know what you’re delivering to your clients, if you’re just delivering index portfolio management with an annual meeting, one time a year, then that’s what you need to describe. If you’re delivering a holistic kind of life plan, life coaching, I’m going to go to Branson, Missouri with you on a fly fishing trip for two weeks, every year to… Like whatever we’re going to be best friends, those relationship is deeper than transactional, those are the extremes, it could be right, it could have a transactional kind of value proposition, which isn’t bad. You can be the person that manages people’s money and it’s sort of relatively, it’s less in-depth life planning, or you can have a deep, deep relationship.
Reese Harper:
We only have like 10 clients and you’re charging them six figures for this very coaching oriented kind of relationship. Whatever it is, that’s where you got to start. Start figuring out your service model, and what you want to deliver first. And then, you can kind of see which fee structure best supports that value proposition, because fixed fee doesn’t support a really fluid flexible, call me and text me whenever you want. I’m always here for you. Branson, Missouri, fly fishing trip, kind of experience. Fixed fee means you got to scope it out, define what you’re going to get paid, define what you’re going to deliver, and make sure that you don’t lose your shirt on…
Chad Jardine:
Because if the customer’s demands are unlimited.
Reese Harper:
Yeah.
Chad Jardine:
Then your fixed fee doesn’t generate enough revenue for you to actually afford, to be able to deliver that level of service.
Reese Harper:
Yeah. Or you have to keep varying that fixed fee…
Chad Jardine:
Or your fixed fee has to be super high.
Reese Harper:
… has to be super high, or you have to adjust it constantly, because the complexity of the client changes every year as their wealth increases, and their demands get higher. So, when you go fixed fee, you’re going to be… The benefits are clearly there, you can scope out the service, you can make sure you have margin, you can control expectations. You never get in a spot where you’re losing money on anybody, because you’re just only delivering what you’re committing to deliver and nothing more, and if you choose to deliver more, you’re at least, you just know that at least you’re making that conscious investment. We’re on an AUM based business, if it’s an exclusively AUM based business, it’s pretty hard to ever know where you’re making money, because on some clients we’re like, have a 60% margin. Other clients are losing your shirt, because they’re calling you all the time, but you’re only charging 1% on $5,000. You’re making 50 bucks a year and they’re like your most demanding customer.
Reese Harper:
So, the AUM model itself can be very difficult to sort of budget and plan for, and the fixed fee can be very predictable. But the downside of the fixed fee is that it ultimately, it’s harder for people without assets and without resources and without high incomes to pay for higher fixed fees. So, fixed fees kind of have a little bit more pressure in the market, for the bulk of the market, because no one… It’s not easy for someone to pay $5,000 to $10,000 or three to seven or whatever.
Jordan Haynes:
Do you ever wonder if you do enough for your clients to be worth what they’re paying you for? Do you feel like you’re delivering enough value? Many advisors wrestle with questions like these. I’ve used the Elements financial planning system for a couple of years now. With it, I can deliver periodic insight about a client’s financial health and progress by utilizing standardized measurements. They know I’m watching their progress and can actually see how my advice is improving their life. With the Elements financial planning system, you can also give your clients consistent planning guidance, and the valuable advice they expect. Check it out at getelements.com/meet.
Chad Jardine:
So, how do you parse that? How do you…
Reese Harper:
I just think that there’s a place for you, to first figure out what your service model is, and second pair that with some combination of either, straight fixed fee or fixed fee plus AUM. I don’t really think there’s a world, I wouldn’t be personally interested in a world where there’s AUM only, there has to be some minimum threshold to access me.
Chad Jardine:
Tell me more about that. Why would, why is your position so absolute about that?
Reese Harper:
I just don’t want clients to feel that I’m delivering something that has no value. I want to have some…
Chad Jardine:
And think that the management of their assets, the value isn’t there?
Reese Harper:
They don’t perceive that the management of their assets. The management of their assets doesn’t require any commitment that they’ve really made besides turning their assets over to me. Right? It is important for them to save money, but even if it was a hundred dollars a year, some kind of, to signal that I have a standard of costs that I need to maintain in my firm. I’m professional, I feel like there’s some level… It signals something to the market.
Reese Harper:
But when you go AUM as your primary business model, you’re going to be having a difficult time accounting for the profitability of your customers at different segments. If you’re delivering a service, that’s really predictable. So I, my view and that we’ve done… What I’ve tried to do at Dentist advisors and continue to do in any firm I was a part of, would be to establish some minimum fees to correspond to the service that a client, either Ill ask to have, or needs to have for their complexity. And then combine that with AUM, so that I’m not raising my fees on customers every year. And so, that I’m not in a spot where I’m having to struggle with incentives around alignment.
Reese Harper:
And I feel like AUM does a really good job. You could say that AUM aligns advisors to want to focus on asset management and grow liquid assets. But I just personally believe that, that’s not a bad alignment to have. As opposed to one where, advisors were incentivized by building real estate portfolios, or starting small businesses with clients, or… I don’t think advisors have a better incentive than building liquidity with a customer. I think that’s actually a really good incentive. And advisors can check themselves periodically and save. You know what? It’s time for me to, maybe I won’t get paid as much on this client, but it’s good for them to be able to invest in back in their business or buy a piece of real estate. I know that affects my revenue, right? But I’m not going to be, I like the incentive of liquidity being a value for advisors.
Chad Jardine:
Are you saying that’s an argument for…
Reese Harper:
Some level of AUM being part of your fee structure, if you don’t have it there, it is going to be harder for you to address the bulk of the market. Because by using AUM as essentially a way to finance your acquisition of smaller customers, you can get down market faster, and you can help more people who might not have resources to begin with. And if you tell someone to access me, it’s $5,000, you’re going to eliminate a big part of the market. If you say to access me, it’s $2,000, but I get paid on your accounts, and when you get bigger, I won’t have to charge you that 2000 anymore. You’re just, you’re choosing as a financial advisor, to just use AUM as a way to finance your way down market slightly and pick up customers, that are going to be harder for you to pick up later, because someone else is going to have picked them up.
Reese Harper:
And so, I like fixed fee and I can be persuaded that it’s a good direction to go. But I think that combination of fixed fee and AUM, for most segments of the market, is probably going to be more scalable and something that advisors should. First start building your value proposition out, and then once you know what the cost of your value proposition is, then you can tailor the fee structure to that.
Chad Jardine:
And you’re saying that, because otherwise, you’re kind of taking a shot in the dark about what you ought to charge or what it seems like that there is…
Reese Harper:
That’s what happens right now. Do you know? They just say, “Hey, this is how much I charge, but I haven’t really thought through what I cost, like what my costs are, what I’m going to actually deliver, what my service is?”
Chad Jardine:
Yes. Is that a harder thing for the advisor? Because they’re… The economics on that deal may not work for them, and they don’t know because they haven’t thought that through. Or is that harder on the client? Because the client doesn’t, because the advisory isn’t presenting the value, in a way that makes the client comfortable with the price.
Reese Harper:
It’s probably both. Okay? Because I feel like it’s both, the client doesn’t really know why they would pay more, or why they would pay a certain amount, or why they should pay anything, because the advisor isn’t scoping their value out real clearly. And then the advisor is also kind of struggling to know if what they’re committing to is the right thing, because they don’t exactly know what it’s going to cost to serve as a customer. And so, I think getting your service model down first and figuring out.
Reese Harper:
This is going to be at least seven hours, maybe as much as nine per year. And this service model is going to be 18 hours per year, between staff and admin and myself. And this one might be 13 hours a year, for this kind of complexity of this type of person. Once you get those things down, then you can decide, is it even worth doing AUM? Or is it even… Maybe you’ll find that AUM works the best for you. It’s like, I’ll finance my way down market, because I’m not… My service model that I want to deliver, isn’t as expensive. It’s not taking me that many hours.
Chad Jardine:
Yeah. All right. Any final thoughts on pricing and business model?
Reese Harper:
Final thought would be, figure out your service model, figure out how many hours a year that’s really going to take at each persona type, each customer type, and then pair your pricing with that. I would suggest that advisors eliminate all of the transactional based compensation from their clientele, and focus on some combination of fees between fixed and AUM. I don’t really believe in an AUM forever kind of model. It’s just kind of the way where the market’s at right now. And I have a lot of situations where when clients have $10 million or millions and millions of dollars. There’s clearly a place for fixed fees to sort of easily come into play there. I mean, that makes a lot of sense. Just early on, I feel like AUM is a great way to finance a more frictionless relationship with clients, if you can control your costs. But you got to know what you’re delivering and make sure you use technology and systems to make sure you don’t lose your shirt in the early years. So.
Chad Jardine:
Yeah. Super helpful. Thank you.
Jordan Haynes:
Next time on Elementality.
Kate Holmes:
I quickly fell in love with going into companies, sitting down with employees, from your rank and file, straight out of college to your executives. You never knew which questions you were going to get. Boy, does that keep you on your toes? And over and over again, regardless of the people, the questions were not, what are the S&P 500 do last month, or what’s the federal reserve doing? It was I’m getting divorced, what should I be thinking about? I’ve got $40,000 of credit card debt, how do I handle my student loans? Like all these questions about life.
Jordan Haynes:
You can learn more, more about the Elements financial planning system at getelements.com/meet. And schedule a time to meet with me, or one of our friendly financial planning experts. Elementality executive creators are Reese Harper and Chad Jardine. Elementality is produced by Abby Morton and directed by Jordan Haynes.