A select group of advisors are significantly increasing their planning fees. Here's the lowdown on unbundling and how your pricing helps or hurts your firm.
Want a quick way to double the assets you bill for and to even triple your planning fees? Talk to David Strege, a principal and senior wealth coach at Syverson, Strege & Company, West Des Moines, Iowa, whose innovative "total net wealth" fee is at the vanguard of more comprehensive and representative advisor pricing.
Tired of the nagging feeling that his firm was underpaid for its integrated planning approach and uncomfortable with the notion they always had to push for more assets to increase revenues from asset-under-management (AUM) fees Strege, both a CFA and CFP, did a cost analysis of the time and services the firm provides to each of its 250 clients. The resulting "total net wealth" fee he developed has been an education for both advisors and clients. Today, some 48% of the firm's revenues come from planning fees and the principals are billing on $582 million instead of just the $236 million of assets they manage. "We even managed to reduce AUM charges by up to 40%, since it's not the bulk of what we do for some clients," Strege says. If you're wondering about client reaction, it's worth noting that only 13 clients out of the firm's 250 didn't renew.
While Strege's tactical pricing may seem a bit revolutionary, he's in good company. In fact, a small but growing number of larger and more mature firms are repricing to reflect the breadth of services and value they deliver-beyond investment management. "I think as an industry you have to ask: Should AUM be the only pricing model?" says Philip Palaveev, a principal of Moss Adams, a Seattle-based consulting firm that benchmarks advisors' pricing and revenues. "We're seeing more wealth management firms make the move to a more comprehensive retainer fee. These retainers are starting to account for a large percentage of their revenues."
Four factors are fascinating when it comes to advisor pricing, Palaveev says. How advisors determine what to charge. Factors they don't take into consideration for their pricing model. How it impacts their revenues. And what the future holds when it comes to competition, the commoditization of investment advice and the compression of pricing.
A new survey from the National Association of Personal Financial Advisors found that a full 60% of advisors still charge asset-under-management fees alone, while Moss Adams says advisors are reporting that up to 50% have begun to charge some form of financial planning fee on top of AUM fees.
Palaveev says the industry's predilection to AUM charges is understandable since asset management is "more leverageable. The time you spend to manage $5 million using model portfolios isn't that different than the time you spend to manage $20 million." Contrast that with the planning piece of an advisor's practice, which Palaveev says "is not very leverageable at all." Instead, it's time and labor intensive to process information from the client, run cash flow, income and retirement projections and coordinate tax, income, insurance and estate planning." The larger and more complex the client, the more time intensive the planning tends to be.
As a result, it's harder to quantify and qualify charges for planning, but more profitable firms are doing just that. "It takes time to prepare a plan that pulls retirement analysis and tax projections and balance sheets together, and the closer someone is to retirement, the more time intensive it gets," says Greg Sullivan, president of McLean, Va.-based Sullivan, Bruyette, Speros & Blayney, a part of Harris Private Bank. "How do you charge for it? We charge separately for it up front and then annually on an ongoing basis."
Planning fees at the firm range between $5,000 and $12,000, but while the average was $5,000 three years ago, today that number has moved to $7,000 to $8,500, and Sullivan says the firm still needs to raise their fees for ongoing annual planning updates. "In some cases, we haven't been charging for that." The firm also charges a tax-preparation fee that ranges from $750 to $5,000.
Going beyond AUM fees is critical, Sullivan says. "You can't be apologetic. We're confident that the holistic planning, investment and tax work we do adds significant value. Many times they need this coordinated analysis. ... For instance, we don't like to farm out decisions on when to exercise options or sell highly concentrated stock positions. We believe you'll get differing views that will be confusing. So at our firm we bring everyone to the table so we can collaborate with the client."
Beyond providing value to clients, it also requires that the firm's three divisions-investment management, planning and tax preparation-generate enough revenues to be profitable. "The divisions have to support themselves on their own revenue base," Sullivan says. "I think unbundled pricing-and there is a trend toward more of it-allows you to charge for the work and service you provide and operate as a business."
Strege maintains that right now many advisors are either overcharging for investment management or undercharging for comprehensive wealth management.
Palaveev, the senior Moss Adams consultant, agrees. "With the wide array of service offerings that advisors provide, I'm always amazed that RIA pricing converges at about 1% for a $1 million account."
Why the profession-wide price similarities? It's because advisors use suspect criteria, Palaveev claims. "They look at how much competitors charge. What they should be asking is: 'Does my pricing undermine my profit margin? And how much value am I creating that I'm not charging for? Am I charging enough to offset my internal costs and produce profit?'"
To do that, you simply need to figure out both your value proposition and what each client costs you per year in time and resources. "Advisors who don't know their internal costs look at their business and think, 'If I take on another client, it costs me nothing,'" says Palaveev. "That's a fallacy. The costs you incur are your time and the effort of the people you're employing. You have limited capacity. You can only take on 60 to 150 clients per advisor. There are limited seats at the table. Let's say you have 100 seats. Every seat costs you a very specific charge. Is the client paying that fare?"
The question for advisors is: Are you deploying your profitability to its highest and best use? So far, the industry continues to grow revenues handsomely, according to the 2007 "Moss Adams Compensation and Staffing Study for Advisors." In fact, the average advisory firm's revenues nearly tripled in the past six years, coming in at $1.6 million in 2006. Pretax income per owner increased 63%, to $370,982.
But going forward, the challenges of asset erosion and competition may change that tune for advisors quickly, Palaveev asserts. Sullivan, whose firm manages some $2 billion, says it is already seeing as much as $25 million go out the door monthly in the form of retiree distributions and income. "If we want to continue growing 15% to 20% a year [the firm grew at 35% last year], we have to grow beyond those distributions, and that's a challenge for a firm our size, especially in a flat or falling market. We're not competing on price yet, but I suspect there will be more people competing for the same client. We'll have to be a lot more proactive," Sullivan says.
Palaveev also believes that the next generation of investors will be very attuned to managing their money using online asset allocation technology. "No one thought it could happen to tax preparation 30 years ago either," he says. The flood of information alone will increase price pressure and commoditization, he warns. "Tons of information decreases prices. At some point, there will be a Morningstar-type service that will allow investors to check and compare advisors." That, too, will spur price competition.
That means that getting your value proposition and pricing right now is critical. In fact, Doug Trott has created a whole business around that very notion and currently benchmarks the pricing, profitability and practices of more than 5,000 registered reps. Trott, who is president of PriceMetrix, the Toronto-based productivity management solution, says the firm will roll out a similar benchmarking and consulting service for investment advisors in 2008. "Our theme isn't 'charge more.' It's 'Understand and get paid what you're worth,'" Trott says.
To help reps do that, their broker-dealers hire PriceMetrix to survey them and then benchmark their practices relative to those of peers. "We can say, here's what the guy down the street charges for very similar services. Why are you charging so little?" The eye-opener for many reps is when they realize they're charging less than a mid-level, self-directed, do-it-yourself account, but often doing financial planning and providing other services as well. Sometimes it's about changing the product mix or the client mix or both, which is where PriceMetrix consultants come in-helping reps to refashion their practices to maximize their profitability.
"Assets go up 11.5% and revenues increase 12.6% in the first year for reps in our program, and gains get larger in subsequent years," Trott says.
Wayne Bloom, director of wealth management at Boston-based Commonwealth, says the firm's own price and practice coaching has yielded significant results. More than 52% of the firm's revenues now come from fee-based accounts, and its fee-based platform manages some $18 billion. Bloom attributes the success to "the relationships that come with fee-based work." The firm's highly evolved coaching process for helping advisors define their value-added and service proposition, right down to helping them design marketing brochures and ads, has also been instrumental, he says.
As a result, in addition to asset management charges, advisors who work with Commonwealth can charge up to $5,000 for a plan or $350 an hour for planning work. "We think it's critical to make the value of our non-asset-management services more valuable, which is what we've done. We also think the unbundling of fees creates fairness-based pricing," Bloom adds.