There is a wide gap between the lowest and highest charging advisers in the current market. Some advisers charge flat fees, some percentage or asset-based fees and others a hybrid of the two. What makes them all so different?
The services offered seem to be very similar across the spectrum of advice firms. Likewise, there seems to be little difference in the ethos of the firms’ principals. They all share a genuine desire to make a difference for their clients. Some advisers, particularly those charging percentage or asset-based fees, put a great deal of emphasis on performance however we’re seeing an increasing number of advisers shift away from that focus.
The difference in pricing may be due to the psychology of the principals. In this instance the word psychology is referring to the principals perception of their service, the market and the clients expectations.
This can be illustrated in two case studies which reflect models at either end of the spectrum. These two individual approaches are consistent with many firms that my colleagues and I have consulted with over the past few years.
Firm A currently charges a minimum of $6,000 upfront and a minimum of $5,000 ongoing. All fees are paid via direct debit.
Firm B currently charges between $2,200 and $3,300 upfront and between $1,200 to $2,000 a year ongoing. All fees are paid through products.
Both firms provide their clients with an annual review and accompanying advice documents. Both give market updates and assist their clients with ad hoc enquiries. The tangible aspects of their service offering appear to be very similar.
The differences start to appear when we discuss the way that they each manage their businesses and their personal perception of their service.Four aspects stand out:
- When discussing the value that they offer, the principal of Firm A spoke about how they make their clients feel. The principal of Firm B focused more on what they do for their clients.
- Firm A surveys their clients to identify what aspects of their service the clients value most. Firm B doesn’t survey their clients.
- Firm A tracks the time and effort taken to service their clients and uses that data to calculate or estimate their cost to serve.
- Firm A has a pricing calculator which they use when quoting fees for their clients. The fees mentioned above are the minimums, with additional services or entities causing the fees to increase. Firm B doesn’t have a methodology for pricing and uses an approach that is more “gut” or “perception of market tolerance” based.
The value of intangibles
The greater focus by Firm A on the intangibles seems to be a key differentiator. The emphasis on making their clients feel heard, understood, supported and held accountable put a value on the service beyond work product or hours logged. The principal of Firm A had much greater confidence in the value of their offering and this resulted in them being more comfortable in charging more and charging directly, rather than through product.
When asked why Firm B didn’t charge more, the principal said that they didn’t know what else they could do for their clients. Their focus on the tangible work as the value they offered seemed to decrease their confidence in charging more. This firm and others like it try to build out their offering with additional reviews or other add ons in order to justify charging more.
Principal A spoke of the results of surveys on their clients and said the results weren’t always positive. In the early days of surveying their clients, they found that their assumptions were often very far off the mark. They had started by assuming that their clients valued investment performance and the adviser’s technical skills the most highly, whereas their survey results showed that while their clients cared about these aspects, they ranked listening, understanding and accountability far higher.
The second and third points also seemed to drive the confidence or lack thereof in these advisers. Understanding exactly how much it cost them to service their clients and what their clients valued gave principal A far greater confidence in setting their pricing. Having a methodology for pricing, even if this is not apparent to the clients, also seems to provide principal A with greater confidence.
Arguments can be made about the socioeconomic positioning of each firm’s client bases and understandably, those with greater wealth have greater capacity to pay. However principal A used the example of cashflow coaching and how people with little disposable income were happy to pay personal budget specialists several thousand dollars a year to help them to manage their budgets and to gain confidence that their bills would be paid every month.
Ultimately, what we have observed is that price is only an issue where the client doesn’t perceive value in the service. It is therefore essential for principals to deeply understand what their clients value most and to build greater confidence in the difference which they can make in their clients lives.
Contact Michael Calam, Regional Manager at Centrepoint Alliance, for more information.