When it comes to pricing, many advisors
are nowhere near as efficient and profitable
as they could be.
When investment advisors hire consultant John Comer to help them build
a firm that will attract wealthier and more profitable clients, they
almost all have a pervasive blind spot: Their own firm's pricing and
profitability. They have little or no idea what revenues each client
produces for their firm each year or how pricing effectively drives all
of their business decisions.
"I had one advisor walk in the door recently and emphatically tell me, 'I have 250 clients and I love them all,'" says Comer, president of Comer Consulting, Minneapolis. Comer soon produced an analysis that clearly showed that some clients were netting the firm revenues of $8,000 a year and others only $500. "The advisor's first reaction was, 'How can I get more of the $8,000 clients and fewer of the $500 ones?'"
It's a question more and more savvy advisors are asking. "I know advisors have an emotional attachment to some clients," Comer says. "There's a place for some of those warm fuzzies if they have a firm handle on costs and revenues. But to not know that some of the least profitable clients may actually be costing the firm money is just foolish."
It's hard to imagine that advisors, who pride themselves on meaningful number crunching and in-depth analysis for clients, don't know per-client costs and revenues. But Comer and other experts say they're in business because it's true.
Mark Tibergien, the renowned Moss Adams consultant who has been
benchmarking the industry's practices and profitability for more than a
decade, reports that he is being hired by more planners than ever
before to help them get their pricing and profitability right. "The
challenge for advisors is to be able to define the services they're
offering and charge accordingly," says Tibergien. "The first thing they
have to understand is their actual cost per client. A lot of this
stuff, advisors can do on their own. But for some reason, they don't."
"If you look at it this way and you're billing a client less than $2,000, you're losing money," Tibergien says.
"If someone is paying you $2,000, you're just breaking even. And if they're not adding any assets, that's an even greater problem."
Without this simple math, advisors risk building an entire firm around
low-margin, demanding clients and unfulfilling, unprofitable pricing.
And who wants that? Independent advisors comprise one of the
fastest-growing segments of the financial services industry in the past
decade, so client demand often has masked the fact that advisors
haven't quite got their pricing right.
"I think the problem is some advisors confuse motion with movement. It's not how fast you spin your wheels, it's are you moving forward," Tibergien says. "If advisors took the time they spent complaining and applied it to doing this kind of math and analysis, they could add real value to their firms. You don't have to do a major marketing study. But it's a waste of time to speculate. You just have to figure it out."
Wealthier clients may well be the goal of many an advisor, but lack of
client cost-benefit analysis means even the best efforts might be
stymied. In fact, a significant number of advisors often structure
their services and pricing so that wealthy clients subsidize less
profitable clients-the exact opposite of the strategy many advisors say
they want to employ. "The highest-end clients tend to be underserved in
most practices I've been in," says Comer. "Which means advisors are
spending fewer per-revenue hours with wealthy clients than they are
with middle class folks."
Comer, like Tibergien, says advisors don't have to hire him to figure out how they're spending their time-the essential resource that a firm must price appropriately. "Say you made $300,000 in gross revenues last year. Now, say you know Client A cost you 20 hours and paid you $10,000 and Client B cost you 30 hours and paid just $2,000. Are you more comfortable charging $500 an hour [the rate for Client A] or $66 an hour [the rate for Client B]?" Comer asks.
It will further help advisors if they break their revenues down into an average per-hour charge (even if they don't charge hourly). They can do this simply by dividing their gross annual revenues by the hours they actually spent working with clients in a year. "It's amazing how many advisors tell me: 'I would never have thought of this,'" Comer says.
Per-hour client revenues are important for a number of reasons. This kind of analysis can reveal that an advisor is spending the brunt of his or her time-hours upon hours-servicing lower-end or unprofitable clients. That should be a startling discovery, especially for a firm determined to swim upstream. And instead of cloning wealthy clients, these advisors will wind up getting the bulk of new client referrals from middle-of-the-road customers who have neither the assets nor income to afford high-end investment advisory services. And the wealthy clients the advisor does have may end up getting the short end of the service stick.
"There are advisors out there who want to do pro bono work," Comer
says. "They aren't really looking to work with affluent people. That's
okay, but you have to ask: Are your affluent clients subsidizing the
rest of your client base? There are also advisors out there who will
shop for a car and plan a vacation for their wealthiest clients. You
have to ask yourself: Which do you want to be?"
To attract and grow a wealthier client base, advisors need to design both their firm's service proposition and target marketing around these wealthier clients' needs. "To do this, I suggest advisors segment their clients into three groups based on how profitable they are, so they know exactly which clients are paying $500 an hour and which are paying $66," Comer argues.
It's only then that a firm can begin to create a business and pricing strategy that makes sense and drives advisors' true goals, Comer and others say. Find out what your wealthiest clients want by asking them and by devoting the hours it takes to truly service them in terms of their financial, investment and estate planning needs. Finding out some clients pay $150 an hour doesn't mean cleaning house of all of these clients-at least not right away. But it might mean downsizing the service advisors provide to less profitable clients, increasing what they charge them, or probably both.
There are many means to greater profitability and attracting wealthier clients. Some firms set a minimum assets-under-management fee they charge-in other words, the advisor will work with anyone so long as they pay their minimum annual fee. Other firms set hard and fast asset minimums for new clients, so they're able to ratchet up asset levels when determining the fees they charge.
Profitability also has a direct impact on growth. "A well-run firm
should be able to double in size by 2010," says Deborah McWhinney,
president of Schwab Institutional, which is in the process of
completing a study of the advisory business that surveyed more than 900
advisors. "And some clients add new assets every year from bonuses,
exercising stock options and profit-sharing plans. Bigger clients can
make a financial advisory business more scalable."
The debate over how to charge clients is as great as what to charge. And you'll get as many answers as advisors you ask. There is no one correct way to charge clients. What is clear is that as advisors' client base moves upstream and service demands get more complex, more charge two fees to compensate them for investment management and for financial planning. In fact, some 67% of advisors now charge separately for a financial plan, according to the recent Napfa (National Association of Personal Financial Advisors) Benchmarking Survey conducted by Moss Adams.
Though asset management fees are likely to remain the most popular fee
choice for advisors, retainer fees are on the rise while hourly fees
are decreasing slightly, Moss Adams found. The reason for adding an
additional layer of planning charges is becoming increasingly clear: As
more Americans prepare to retiree, their asset management needs flatten
out while their planning needs increase, especially in the years before
and after retirement. Charging a separate fee for planning allows firms
to be compensated for the additional hours they spend with these types
of clients. And it may offset advisors' asset depletion as more than 75
million baby boomers begin to spend their assets over the next 20
What is also clear is that knowing how profitable each client is will drive everything from overall firm revenues and principals' compensation to ultimate firm direction and growth.
Advisors we spoke to have tried just about every fathomable type of
pricing mix over the years, and have arrived at varying models. What
most seem to agree on, however, is that certain clients require more
work. More firms also are starting to realize that pricing is an
integral part of the filter they must build and run all of their
decisions through in order to build a more profitable firm. This filter
allows firms to be much more deliberately strategic in terms of the
clients they take on, how they staff, how they compensate staff, how
they build their technology, how they market and how they allocate
By most estimates Bill Baldwin already may have arrived at that penultimate place advisors dream about. His firm manages more than $700 million for just 100 clients who have an average $7 million with the firm. For that, Baldwin, his partner and 11 employees charge AUM fee of 35 basis points, but also charge a retainer or hourly fees (his is $400 per hour) where warranted.
"We're a pretty profitable firm," says a modest Baldwin, a principal with Pillar Financial Advisors in Waltham, Mass. The firm has drilled down to look at profitability both with the help of Moss Adams and on their own.
The trick to profitability, he adds, is to provide a lot of service and
leverage off of other professionals. "We opted for this dual-fee model
because we don't want to wind up losing money on any one client. There
are folks, say someone in the midst of divorce, who will need hours and
hours of assistance. But I also think we try to measure each client by
the quality of the relationship we have overall," adds Baldwin, a
two-decade-plus veteran of the fee-based investment advice.
At the other end of the spectrum is Keith Newcomb, the principal of Full Life Financial in Nashville, Tenn., who has been building his firm for four years. Newcomb was dually licensed as a registered rep and investment advisor until June. After much tinkering, Newcomb says he now charges an asset-based fee for investment management and a $250 hourly fee for planning. "I think the key benefit is you don't run into the problem of wealthy clients subsidizing everyone else," Newcomb says. "I also think that flat fees tend to get away from us and then we have scope-of-engagement creep. The client engagement gets bigger and bigger and either we end up eating the hours or we have to charge extra, which displeases the client." Currently, Newcomb's financial plans cost between $2,500 and $10,000 and his AUM fee starts at 2.5% and decreases to 0.40% for large accounts.
"Right now, I have a fee schedule that works," Newcomb says. "I'm open
to reducing fees as scale increases. I even ask clients to help me do
this by helping me grow."
While advisors have been lucky so far to have competitors like banks and wirehouses charging a good bit more than advisors, that's rapidly changing, says Chip Roame, principal of Tiburon Strategic Advisors, a financial services consulting firm.
"Traditionally wirehouses and others have charged a lot," says Roame. "That's the kind of competitors you like. But these guys want assets at any price at all and have become cost players. At the same time, discounters are offering new wrap fee programs at just 50 basis points. That's pricing pressure. Is it as in depth as what an advisor will do? Maybe not. But you have to ask what clients need."
Schwab's McWhinney agrees that advisors need to be observant of what
their competitors are doing in pricing. But she adds that even in the
bleak 2000-2002 market, what fee compression took place was very
modest. Today, fee compression seems to be even less significant. "With
very large clients, fee percentages may go down but absolute fees will
stay the same or go higher," she says.
Without knowing what each client costs a firm, advisors have no idea how profitable or costly each really is. Here's a simple equation advisors can use to get a handle on average per-client costs: Let's say a firm's total annual expenses are $300,000 for servicing 150 clients. Simple division tells us that the average cost per client is $2,000.