Are We Earning Unreasonable Fees?
The lack of standardized definitions of advice and wealth management may make it more difficult for the market to find the Adam Smith point of equilibrium, but it does not mean that the market is misfunctioning. First of all, pricing information is widely available. It is a matter of public disclosure through the ADV Part II brochures, and there are also many surveys one can easily find. In a recent pricing project, we identified 10 different pricing benchmarks from diverse sources.
Clients are not oblivious to this information and not unsophisticated in using it. In a survey of the advisors we work with, we asked if clients ask about fees. The prevailing answer was “often, but not always.” Clients do inform themselves. However, when we ask the question, “Do clients negotiate fees?” 84% of the firms said, it “happens, but rarely.”
Asking about fees is not the same as negotiating. Unfortunately, when the advisors themselves feel insecure in their professional competency or their ability to add value to the client (or both) they tend to react by discounting. Some years ago, I had a younger associate who was invited to present at a conference. He was not very experienced and shared with me that he doubted whether he had enough expertise on the topic. After some anxious thinking, he decided to cut his speaking fee in half. I think that’s just plain wrong. If you don’t have much to say, don’t accept the speaking engagement. But don’t lower the price. If you can’t cook, the answer is not to open a cheap restaurant!
Unfortunately, that’s what often happens. Advisors who are not very sure they can provide good advice decide that lowering the price is the way to alleviate the problem. Of course, then they feel price compression every time a client asks.
Do Clients Care About Fees?
No one says, “I need surgery. Who is the cheapest surgeon in town?” No one wants to do “three for the price of two” root canals. When the stakes are high, clients equate price with quality; in all professional services, clients would rather work with a premier provider who has the necessary skills and experience than take a risk with someone who offers a 20%-off coupon. This relationship between price and quality continues to protect pricing for premier providers even in very competitive professional services such as accounting and law.
In a survey conducted by State Street Global Advisors in 2017, clients ranked fees as the fourth most important factor they evaluate when choosing an advisor, and only 12% of clients ranked that factor as important. Put that next to “trustworthiness,” which 69% of clients considered most important, and the advisor’s understanding of client needs, named by 20%.
But the key thing here is to be a “premier” provider, engaging in the kind of work that has critical outcomes for the client. Patients will in fact price shop for elective surgeries. Taxpayers with basic two-page tax returns will definitely compare the price for accountants. There are a lot of 1-800-LAW-HELP services that explicitly compete on price. So the fundamental question to advisors is: Will you position yourself as the equivalent of the heart surgeon or be the financial-planning equivalent of laser hair removal?
Data shows that larger firms working with larger clients are already charging a lot more for their services and are more likely to increase prices than lower them. When we compare the pricing reported by “super ensemble” firms (the largest firms) to the overall industry pricing as reported by surveys, we see a “premium” of 5 to 10 basis points in the fee charged by larger firms at every level of client over the industry average. In our studies, large firms are also more likely to increase their fees than the average firm.
Conclusion
Pricing is a critical decision. It determines profoundly the economics of the client-advisor relationship. It also sets the tone for the nature of the relationship. It creates a methodology not just for how money is collected but also for how information flows and how much knowledge and insight is retained and delivered. Pricing unfortunately is also a one-way street. If you were to ask attorneys and accountants, they would probably tell you that they wish they could get away from the hourly bills. Airlines would probably tell you that they wish they didn’t have to constantly offer “discounts.”
The advisory industry has to be very mindful and careful in determining its own way of pricing. There is nothing wrong with consumers asking “Why do I hire you, and how much do I pay?” That is the most fundamental (and very healthy) question. If you feel threatened by it, forget discounts. You shouldn’t be an advisor.
Philip Palaveev is the CEO of the Ensemble Practice LLC. He’s an industry consultant, author of the books G2: Building the Next Generation and The Ensemble Practice and the lead faculty member for the G2 Institute.