How to raise fees without ticking off clients

Increasing an advisory firm’s profitability through analyzing and tweaking the fee structure without undermining clients’ trust can be tricky, but the results are worth it.

That was the conclusion of a panel during an InvestmentNews webcast Tuesday about balancing fees and commissions to optimize revenue.

Ken Evans, director of operations at Moss Adams Wealth Advisors LLC, said advisers have two primary ways to analyze their fee structure: stay abreast of prevailing best practices and business models, or undertake their own primary research.

For primary research, he suggested a top-down approach.

“Start by looking at total revenue and then direct expenses, primarily the compensation of the professionals at the firm,” Mr. Evans said. “Direct expenses should be taking up no more than 40% of top-line revenue. Then, before you look at overhead expenses, you want to try and target an ultimate operating profit margin of 25%. Thus, you’d leave 35% for overhead.”

Sheryl Garrett, founder of The Garrett Planning Network Inc. is a proponent of a hourly-fee model and said tracking time spent with clients can be helpful in maximizing profitability.

“If you can measure it, you can manage it,” she said. “Track the time each professional is spending on client engagement. People are probably cringing over this, but it does make a big difference.”

Ms. Garrett became a proponent of time-based compensation after concluding that asset-based fees don’t accurately reflect the work and commitment of the adviser.

“I haven’t seen one single formula that accurately reflects the complexity and professionalism involved in a project,” Ms. Garrett said. “There are situations where you get significantly overpaid for services rendered and situations where you get significantly underpaid.”

Mr. Evans said he could encounters opposition from advisers to counting minutes because “it takes a lot of discipline and entrepreneurial people feel like they have a handle on their business,”

Once an adviser analyzes fees, the next question is how to raise them. Data from the 2012 InvestmentNews/Moss Adams Financial Performance Study found that one in five firms that participated changed their fee structure last year, with 87% raising their fees.

How to raise fees, then, is a key issue advisers face.

“I would start by looking at how much you charge, versus what others in the industry are charging for a similar service,” said Dan Seivert, chief executive officer and managing partner at Echelon Partners. “It isn’t tough to get a sense of what other advisers are charging, but it gets more difficult when trying to figure out exactly what services are being provided for that charge.”

Mr. Seivert recommended that any fee increase be accompanied by a parallel emphasis on the specific benefits such an increase could provide the client. “If you’re just increasing price, and everything else stays the same, it makes things much more difficult.”

The crucial factor in fee increases, according to Ms. Garrett, is bringing it up with clients at the appropriate time

“Don’t increase your fees more than every other year,” Ms. Garrett said. “We all want long-term relationships with people we care about and like. So, if we’re seeing them monthly, quarterly, or yearly, I wouldn’t want to have to say: ‘By the way, I’m raising your rates again!’”

Both Mr. Seivert and Ms. Garrett have found that a well-thought-out fee increase is less awkward and painful than expected.
“When advisers raise their prices,” Mr. Seivert said, “they look back and say: ‘I should have done that long ago because that was easy.’”