Financial advisors are increasingly expanding their service offerings to remain competitive as investors expect a more holistic financial experience. However, despite offering more, advisors are often not compensated for it.
My team and I speak with advisors every day about their businesses, and we often find that many of their fees are not keeping pace with the services they are offering, with inflation, and with their peers in the industry. Often, only a small portion of clients are generating a large majority of the revenue, with others generating next to nothing for the advisor—we have even seen net revenue per client in the single digits.
As such, it’s crucial for advisors to regularly reevaluate their fees and whether they need to increase those fees. Making this decision is not something that comes easily. Every advisor knows that client satisfaction is paramount, so approaching longstanding and valued clients to tell them you need to increase their fees can be difficult and emotional. However, it is sometimes necessary to continue to grow one’s business and meet your own goals, and there are more solutions to work with clients on this than one might think.
Here are several considerations and best practices for advisors when evaluating their fee structure.
Getting Started
Before making any decisions, advisors need to have a comprehensive view of where they stand. It’s easy to see money coming in and assume everything is fine, but doing a robust audit may reveal lower profitability than anticipated. An in-depth evaluation may reveal hard data that can justify a fee increase and give advisors the evidence they need to more confidently approach clients about it. This is something that advisors should do at least once a year.
In their evaluation, advisors should look at the net profitability for each client, taking into account all costs associated with delivering on their segmented service model. In addition, they should compare their fees with averages for their region. They may want to enlist the help of a third-party business consultant, who would have additional insights and guidance on industry data and practices.
Having The Conversation
Once advisors have gathered where they stand in the fee landscape and made the decision to adjust their fees, it may be tempting to only apply the increase to new clients. However, this won’t provide enough immediate revenue to boost profitability.
As an advisor, client satisfaction and maintaining the strong relationships built over many years are critical. It can understandably be difficult to think about approaching clients to suggest a fee increase. That’s why it is vital to have a plan for these conversations. Advisors can even write up a “script” of some key talking points to hit on, while still keeping the conversations personal.
When it comes to broaching the topic, evidence-based rationale is key. Clients will be more amenable to accepting a fee increase if there are good reasons as to why. By bringing up things like how their capabilities have grown and how the cost of doing business has risen, advisors can help clients better appreciate where they are coming from. Data points from the revenue audit and research into industry standards can also help here.
Most importantly, advisors should approach the conversation with empathy. This is a sensitive topic, and every client’s views and financial situation are different. By maintaining strong relationships with clients to begin with, it will be easier to speak candidly.
Alternative Solutions
A blanket fee increase won’t be a one size fits all solution across an advisor’s client base. For instance, advisors can create a retainer model for lower-profit clients who want to stay on board, offering them a streamlined service package that meets their needs without stretching the advisor's resources. This model allows clients to maintain access to essential services while acknowledging the advisor's need to prioritize time and resources effectively.
Alternatively, senior advisors might consider transferring some clients to an associate advisor within their practice, ensuring that these clients continue to receive personalized attention while freeing up the senior advisor's time to focus on higher-value relationships. This approach not only maintains client satisfaction but also serves as a valuable growth opportunity for associate advisors, who can build their experience and client base.
In some cases, it might be beneficial to introduce tiered service levels, where clients can choose a package that best fits their needs and budget. This strategy can help clients feel more in control of their financial planning costs while allowing advisors to segment their client base according to profitability. By offering a range of service options, advisors can cater to different client segments without compromising the overall quality of service.
Ultimately, the key is to find a balance that preserves client relationships while ensuring the long-term sustainability and growth of the advisor’s business. Advisors should feel empowered to explore these alternatives as part of a broader strategy to align their fees with the value they deliver, ensuring that every client relationship is mutually beneficial.
Of course, there may be some clients with special circumstances whom advisors want to keep at the same fee structure for a variety of reasons. Advisors have the best understanding of their clients and their relationships with them, so ultimately it is an advisor’s choice on how to move forward. In these situations, it’s important for an advisor to find the balance between continuing to nurture their client relationships while also advocating for themselves. They can feel empowered to do so by ensuring they’re as informed as possible about how their fees stack up so that they can make the best decision for their business in the long term.
Matt Matrisian is head of client growth at AssetMark.