If I needed open heart surgery, I would want the very best surgeon I could find. And I would expect that surgeon to charge at least market rates, if not more.
If that surgeon charged rates that were far below the market, I would be very concerned. After all, why would an elite medical professional have to slash her fees? My impression of the heart surgeon would be degraded if she were the low-priced option.
I believe financial advisory clients, including prospective clients, have a similar mindset when it comes to choosing a financial advisor. They want to save on fees, but their perception of an advisor won't improve if it looked like he was trying to hard to compete on fees. In fact, it may have the opposite effect.
Roughly 30 years ago, I remember having a prospective client visit with me because he had heard I was an expert at his company’s pension plan. He said he already had a financial advisor, but wondered if I could simply help him make the right decisions in regard to his company’s retirement benefits.
Before offering up any sort of fee for my services, I asked about his current advisor. He proceeded to tell me how awesome his advisor was. They met every quarter, and the advisor would agree to go wherever was most convenient for the client. The last time they met, the advisor even picked him up at the airport and drove him to lunch for their meeting.
I told the client that this sounded like hands-on, old-school service, and I could understand why he enjoyed working with his advisor. Then I asked how much he pays his advisor. The answer: $1,000 per year.
I expressed a bit of shock and dismay, admitting I certainly couldn’t beat his existing advisor in a fee fight. In fact, I told him, my fee was $500 per hour and all my client meetings were either in my office or over the phone. I didn’t make house calls.
Now, I had never actually charged anyone $500 per hour (this was 30 years ago, remember), but I wanted to stir up some doubt in the client’s mind. He’s paying his existing advisor about $100 per hour – even less when all the travel is factored in – and here I am telling him I’m five times more expensive.
You know how this story ends: the client cut ties with his existing advisor and hired me. He ultimately ended up entrusting about $3 million to me, where I charged him our standard AUM fee of about 1%.
I’m certainly not advocating for overcharging clients. But I am strongly encouraging you to charge at least a market rate, and add a premium that reflects what your service is worth. Not only will you be fairly compensated for the value you bring, but clients will have a deeper level of trust and respect for you – and that will almost certainly pay dividends when offering guidance during turbulent times.
Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA.
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