We frequently field questions from advisors on the topic of pricing. The questions usually start with, "How much should I be charging?" or more frequently, "What are other people charging?" To answer the first question-how much, or equally important, in what way should an advisor be charging-we have to understand a number of things about the advisor's practice:
What is it the firm is offering to clients? What is the value provided to clients?
How does the firm want to position that offering in its market? Does it want to be the low-cost leader? Does the firm want to charge similar fees or higher fees than other firms? How do the offering and client service experience compare with those of other firms in the market?
How much does it cost the firm to create the client service experience it promises?
Your pricing strategy should be the confluence of three factors: 1) the cost to deliver service; 2) the value of what you deliver; and 3) what the market charges for similar products/services.
Let's look at each of the three factors in turn.
The Market
Moss Adams gathers data on pricing and pricing trends in its annual study of advisory firms, and our data has shown that charging fees based on assets under management (AUM) continues to be the dominant pricing method for most firms, even among those that do more than manage assets. The preliminary findings from our 2008 study (the Moss Adams 2008 Financial Performance Study of Financial Advisory Firms, sponsored by Genworth Financial) indicate that 68% of firms charge at least 75% of their clients by AUM only, and 73% of firms charging an AUM fee bundle in other services for the same fee.
The method of charging clients varies somewhat based on the size and structure of the firm, though AUM fees dominate across all structures. (See Figure 1.)
For those firms that charged on the basis of assets under management, the median fees as a percentage of assets under management varied based on the size of the client, as you would expect. (See Figure 2.)
It is hard to tell by looking at this data exactly what services are included in the fee being charged. It's also hard to tell what level of expertise the firm employs in delivering those services or what charges the client is paying for that are outsourced by their advisor. Without knowing what is delivered for the fee being charged, advisors find it difficult to evaluate their own fees in the market. It's also difficult for consumers to compare one advisor's fees to another. Yet the most important information you can provide to clients in regard to your fees is transparency on what they are paying to whom and for what. If they are "comparison shopping," the information you need to be armed with is not just what your market competitors charge, but what is included in their fee. If you are charging more, do not start by lowering your fee. Start by describing the value you deliver.