To remain competitive, financial advisors are increasingly expanding their service offerings as their clients expect a more holistic financial experience. Yet 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, keeping up with inflation, or changing to reflect what their peers are charging. Often it’s only a small portion of the clients generating most of the revenue, and since the others are generating next to nothing, advisors can be making less than $10 net revenue per client (after expenses).
With that in mind, it’s crucial for advisors to regularly re-evaluate their fees—and whether they should be increased. It’s not an easy decision. Every advisor knows that client satisfaction is paramount, and it can be emotional and difficult to approach longstanding, valued clients and say they must pay more. But it’s sometimes necessary if you want to continue to grow your business and meet your own goals.
The good news is that there are more solutions to the problem than you might think.
Here are several considerations and best practices for advisors evaluating their own fee structures.
Getting Started
Before making any decisions, advisors need to have a comprehensive view of where they stand. It’s easy for them to see money coming in and assume everything is fine, but by doing a robust audit they may discover whether their profitability is less than they thought. Through the hard data they find from an in-depth evaluation, they can find the evidence they need to confidently approach clients and justify fee increases. It’s something they should do at least once a year.
During this evaluation, they should look at the net profitability for each client, taking into account all the costs associated with delivering on their segmented service model. In addition, they should compare their fees with the averages in 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 figured out where they stand in the fee landscape and made the decision to adjust their charges, it may be tempting to apply the increases only to new clients. But that won’t provide enough immediate revenue to boost profitability.
It’s critical that advisors maintain the strong client relationships that they’ve built over many years, and it’s understandably difficult for them to think about approaching current clients and asking them to pay more. That’s why it’s vital to have a plan for these conversations. Advisors can even write up a “script” of some key talking points to hit on while keeping the conversations personal.
When it comes to broaching the topic, it’s key for the advisor to use an evidence-based rationale. The clients will be more amenable to fee increases if they see why it’s necessary. The advisor can explain how the firm’s capabilities have grown and how the cost of doing business has risen, which can help the clients better appreciate where the advisor is 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. Advisors who have maintained strong relationships with clients to begin with will find it easier to speak candidly.
Alternative Solutions
A blanket fee increase won’t be a one-size-fits-all solution for an advisor’s entire 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 advisory’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 for the advisor is to find a balance that preserves their client relationships while ensuring the long-term sustainability and growth of the 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’s the advisor’s choice on how to move forward. In these situations, it’s important for them to find a balance in which they can both nurture their clients and also advocate for themselves. An advisor will feel better empowered to do this by making sure they know how their fees stack up, and that will help them make the best decisions for their business in the long term.
Matt Matrisian is head of client growth at AssetMark.