3 Ways to Structure Your Fees – and 3 Concrete Ways to Communicate Your Value

“Fees are only an issue when value is questioned.” I’m not sure if that’s a quote from someone or something that I made up, but either way, you get the point. Your clients will most likely never question how much you charge for your services if you are providing real value. But as I wrote last month,Investchart your pricing has to be aligned with what the client appreciates.

Two weeks ago, I shared a story about an advisor who had contacted me with a difficult client situation: his client valued the advisor’s planning, but couldn’t understand why he was being charged for AUM. In other words, value was perceived in one area and fees were charged in another. Said another way; fees were an issue because value was not perceived.

A new fee schedule
Luckily, the advisor was already leaning in the direction of changing his fee schedule. At 50bps, the AUM fee the client (with $2mm in assets) was being charged about $10,000 annually. The new model that we discussed was as follows:
• Investment Oversight – 25bps: This fee is for the creation of an investment policy statement for each goal or portfolio, strategic asset allocation, manager selection and review, and consolidated reporting.
• Aggregation Services – 5bps: This fee is to set up and maintain aggregation services on all accounts held with the advisor, or outside the current relationship (accounts such as savings/checking at banks and 401(k) plans). It also includes access to a client portal for document storage.
Planning Services – $4,000 annually: This fee (charged quarterly) is for all planning-related activities during the year. The firm has the right to adjust the fees annually (with the consent of the client), based on the scope of the work projected for the upcoming year.

What is interesting in this example is that the fee to the advisor was exactly the same as the old AUM model, but it:
• More firmly emphasizes the planning and de-emphasizes the AUM model
Provides for flexibility for the client (and advisor) as the pricing becomes more “à la carte,” giving the client transparency and understanding of the options
Provides more stability in the advisor’s income during a potential market downturn

Even if you build it, they may not come (but I think they will)
The big question here is: Will the client actually write checks or have a flat planning fee deducted from the portfolio for planning, rather than having a percentage come out of their investment portfolio?

In our advisor example, the client readily offered that he appreciated the planning service. But what if the client doesn’t understand exactly what you do? How do you communicate the ongoing value for the plan? You have to tell them, show them, and re-tell them. There are a few relatively easy ways to communicate the value of planning and your work for the client:

1. “Billable hours” format. Think about any legal work you have ever had done. Did the attorney statement show calls, meetings, or research tied to a billable hour statement? While I would never suggest associating dollars with the work, think about what it would look like to add your (and your staff) activities on a sheet dating back to the last time you met with your clients and going over it with the client . Have you done cash flow planning, beneficiary checkups, or reviewed the current year’s 1040? Think about non-investment-related activities like confirming beneficiary for estate planning or reviewing insurance policies. What about conversations with CPAs or attorneys regarding taxes and/or estate work? Feel free to add in conferences, educational meetings, or webinars, if they pertain to your clients’ needs. You want to show what is going on behind the scenes when the client is not there.
2. A client “year in the life” service document. Telling someone that you will be billing them quarterly for advice or planning may not be resonate with a client –especially one that is new to you and your services. While many firms can clearly articulate their investment process or planning process, they have a harder time differentiating their service process – especially one that flows from one year to another. A number of firms have begun to use a client service or planning roadmap. The idea is that there is a written document that shows your commitment to planning and client education. Think about creating a roadmap that shows planning milestones and specific follow-up throughout the process. Maybe you could think about a focus on a goals review (for investments) in the first quarter, an estate plan update review in the second, cash flow planning in the third and charitable planning or tax planning in the fourth quarter.
3. A list of services, or “client service statement.” Some firms have created a one-page document of all the services they provide. The document, in bullet point form, is a great way to list out all you can (and do) provide for your clients and should be delivered or discussed at every client meeting. By showing the depth and scope of your organization, you are showing that you are beyond the transactional-investment-focused advisors.

There are a lot of ways to add value to a client relationship, and a lot of ways to get paid for the value you provide, as well. Wouldn’t it be great if adding value and getting paid were aligned? When the Next Wave of planning hits, will your business be aligned ?

Image courtesy of freedigitalphotos.net

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John Anderson

John Anderson

John Anderson is the creator and lead author of Practically Speaking blog and Managing Director of Practice Management Solutions for the SEI Advisor Network.

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