Tailor advisory fees to each client's needs

Key is getting people to focus on the value of service, rather than the price

Sep 11, 2017 @ 2:00 pm

By Jeff Benjamin

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No matter which fee structure they're using, financial advisers are selling themselves short by charging all their clients the same way, according to Matthew Jackson, director at Simon-Kucher and Partners, a global consulting firm specializing in pricing models.

"When it comes to fees, it should always come back to value," Mr. Jackson said during a presentation at the Insider's Forum in Nashville.

Mr. Jackson's research delves deep into the weeds of comparing fee-based pricing to retainer fees and other methods of charging clients. But his message on Friday was primarily aimed at getting advisers to better understand their clients and charging fees based on how those clients perceive the value being provided.

"If you have one price, it will be too expensive for some people, and there are also people who would pay you more if you offered more services," he said.

(More: Fee pressures have RIAs considering move from AUM to retainer model)

Mr. Jackson cited several examples from across the business spectrum to illustrate how advisers are leaving money on the table by not better highlighting their value, and then matching services to different client types.

In the airline industry, for example, he pointed out how a plane full of people all get to the same place at the same time, but some are willing to pay much more for first-class seats.

"No passenger needs to fly first class, unless they have a medical situation, but they choose to," he said.

The typical fee-based pricing model based on assets under management, often includes providing all clients with the same level of service, which Mr. Jackson said does not properly compensate the adviser for the varying service needs across a client base.

"Offering the same level of service for clients with different AUM is a problem," he said.

The first step, he explained, is to get clients to focus on the value they are receiving, instead of just the price they are paying.

He cited the tire industry, which used to only compete on price, which lead to more consumers buying the lowest-quality tires.

Then the industry starting pricing tires based on longevity measured in miles, which helped consumers match value with price.

(More: State-registered advisers face fee model inconsistencies)

As an example of how one adviser is equating value with price, Mr. Jackson pointed out how Simonet Financial Group is using something comparable to a McDonald's menu to allow clients to build their own service-level packages.

When offering various pricing options to clients, Mr. Jackson recommends offering at least three choices for the psychological reason that people will gravitate toward the cheapest option if there are only two choices.

But if there are three, some clients will select the most expensive option, he said.

It's challenging to link value to multiple pricing models, Mr. Jackson said, even warning that some clients probably won't embrace the change.

"I'd like to make clear that none of this is easy," he said. "You can get it all right and still fail miserably."

In terms of introducing existing clients to a fee structure that might involve them paying extra for some of the services they've grown accustomed to, Mr. Jackson said there will be a "hard and soft migration."

"You have to think about the clients you want to keep and the clients you're willing to lose, because there is definitely a risk of losing clients," he said.

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