No matter how long I work with fee-for-service planners, I find they dread fee increases. Especially now with inflation and the market, it can feel daunting. So let me give you friendly permission: if you are not using a percentage of assets fee structure, you need to reassess your fees every year or so.
As your business grows, your firm is likely to be your biggest personal asset - or one of your most valuable assets. So you need to take care to build the value as best you can and that includes competitive pricing. Put it this way: would you advise a client to update, improve, or remodel their home and then price it below its appreciated market value? Could you justify the benefits to your client, their neighbors, and the new owners? Of course not. Now insert your firm into this equation. The same principle applies. Let’s dive in.
Create a regularly scheduled process
By creating a regularly scheduled process to reassess fees and communicate them to your clients, you can reduce the angst you may feel surrounding increases while keeping your firm competitive.
Clients will learn that your scheduled fee assessment is part of the routine. You will stay on par with other advisors and protect your profit margin as other costs of doing business increase. Recalculate the fees every year or two. Waiting three or more years causes clients to forget increases happen and you lose the ability to comfortably explain the increase. The increase can be quite large if you let it go too long. The bigger the increase, the bigger the risk of client departure, and the more stressful it is for you. That said, I have seen some pretty huge increases, so if you are well below the market, don’t be afraid to play catch-up with some hefty increases. Clear communication around fees as they rise or fall is imperative—more on that below.
If you have a history of discounts or underpricing your planning, you’ll want to work to bring all of your clients’ fees into alignment. It is awkward if they happen to discover they are charged differently from one another. It’s rare, but still a bit of a risk. You also don’t want to find yourself in the position of resenting the work you do for someone who isn’t compensating you fairly. This alignment may not come in one fell swoop, but rather over the course of a few years. Just keep working to ensure each client is moving toward paying you what you are worth.
Conduct research and analysis
Begin your process with research. Michael Kitces has published research on advisor fees, as has Bob Veres. Use any benchmarking survey data you have taken part in as well (XY Planning Network members can find the XYPN Benchmarking Study in XYPN Academy). Be sure you research both in your particular fee structure as well as industry-wide. You will want to research your geographic area since fees can fluctuate from region to region and city to city. Finally, you must work within whatever restrictions your state might place upon you if you are state registered.
In general, you will find 3-5% or the equivalent is a reasonable increase. If you are fully AUM, AUA, or using net worth, then the market will adjust your fees for good or for ill. If you have found that your rates are below market and not sustainable, you can increase the basis points you are charging. I find this happens when folks have launched with a significantly discounted AUM rate. Industry averages are still running at about 1% for the first million or so of assets, decreasing with the amount of assets being managed. Unfortunately, this year is probably not the year to raise your basis points even if your revenue has taken a hit. If you have decided you should have been charging a higher rate, tread lightly as you work to become more competitive.
I have noticed that planners with an hourly fee structure often neglect to raise their hourly rate. I suggest you increment your hourly rate a bit every year or two. Your experience grows, therefore your fees should be commensurate. Definitely adjust to recognize any additional designations you have earned, especially if you have earned your CFP® marks. For reference, this 2021 blog from Michael Kitces on planner compensation shows that while hourly planners make between $100 and $300 an hour, those charging on assets earn the equivalent of $350 to $800 dollars an hour - with those above the 85th percentile making upwards of $950/hour! Let’s keep working to get those hourly rates in line, within the limits of your particular state’s regulators’ practices of course.
For those of you using a complexity calculator, you may be adjusting different portions of the calculator or adjusting across the board. If you feel your fees have not been reflecting the value provided, you can adjust the various components to create a more accurate fee structure. You shouldn’t need to alter your calculator drastically as time goes on, but you do have a few more levers to pull than other fee structures.
To prepare for fee analysis, keep a running report of your clients and the time you have spent working with and for them, as well as the value you provide. To help calculate the value, record the complexities you are addressing as well as other aspects of your work value, such as facilitating spouse communication or financial anxiety. Some go so far as to jokingly refer to a PITA fee. While I can’t quite condone charging someone for being a pain in the…, well, you know, I can condone realizing that more complex work has more value and you should be compensated accordingly. Determine what your effective hourly rate is for each client as well as the annual revenue and profit.
Establish your goals and track your progress
Determine your goal for a revenue increase overall. We’re setting aside growth from new clients and new assets. That’s very important, but outside of the fee conversation for the moment. Simply put, look at your average fee and determine the approximate increase you want to see. If you are averaging $8000 per client, you may wish to see that average at $8300 in the coming year. Run each client through your calculator to establish their new fee and do a bit of a sanity check. If they're significantly below your goal compensation, you need to take extra strides to catch up. If they seem to be high, you could let them ride for another year. As you evaluate each client, keep in mind any unique situations you should consider such as life events or financial transitions. Don’t be a pushover, but do pay attention if there are situations where a fee shift will seem inappropriate.
Once you have the fees adjusted, determine the aggregate revenue change. Track your progress on communicating changes. You will want to know how well you are retaining your clients and staying on track for your renewal revenue goals.
Communication is key
Communication of any fee adjustments with your clients begins well before you attach a number to it. Start planting seeds every time you interact to cement your value before fee increase and renewal time. When you meet with your clients, be sure you remind them of what you’ve done together. Compliment their progress and dedication to your work together. There’s no progress, you say? Then you compliment that they are still trying! Some days the fact they don’t cancel the appointment is the win. As you work together, remind clients of what’s to come. Paint a picture of working together forever. Use a lot of “we” language so they feel like a collaborative partner and see you as a valuable part of their team. At the end of your meetings, you can ask what their biggest takeaway was or what their favorite part of the meeting was. By asking them to think about it and share it with you, you help solidify awareness of your value more so than when you just remind them yourself. Taking a few minutes like this with your clients to vocalize your firm’s value helps prepare them year-round for renewals and fee increases.
As you implement fee adjustments, remember that each client does not have to be treated identically. The fee adjustments don’t have to be equal. Some clients you have discounted may be catching up while others may have changes that result in their fees going down or holding steady. As you review fees make sure you’re taking into account the workload and expertise needed. Some planners find that quoting a new, higher fee can be easier with brand-new clients. You can raise your fees on your ADV and apply those to new clients without increasing fees on your existing clients. This may help you get used to the new fees before you begin to bring existing clients in line with the updated fees. Gain some confidence first if you need to.
Don’t spring a fee increase on a client. Give them some notification that you are working on this project. An email is fine for this. Don’t feel you need to reach out on a call, but also don’t hide it in a newsletter they may not read.
I prefer that fee changes be done in the course of a regularly scheduled meeting, but you can have success using emails as well, especially as your clients learn your routine and what time of year you commonly do your assessments. Create templates for any emails you plan to send and some scripting for the conversations. Obviously, you won’t truly script the conversation, but becoming comfortable with how you want to deliver an increase will pay off. The more comfortable you sound, the more confident you appear and that is one of the keys to success.
When the time comes to tell a client their fee is going up, you must embrace the presumptive close. You presume they will renew and continue on. Period. Confidence can be faked. Even if you aren’t confident, pretend you are. Don’t be afraid and definitely do not apologize for fee increases. Remember, your value is beyond just investments. When you tell them the new fee, remember this: Quote & Quiet. Quote the fee and close your mouth. Count to 10 in your head or breathe quietly in and out slowly, but do not fill the space with your voice. Just let them process. They’ll probably respond if you wait a moment. If they don’t respond you remember the presumptive close and just say that you are so excited about the work coming up or you appreciate their continued faith in you - whatever you feel comfortable with.
But what if they say no? Be gracious. Let them go. Tell them they are welcome back anytime (if that’s true). Often people shop around and realize that you’re worth what you charged! Relax and know you can sign another new client.
So here’s the TL;DR:
Set a specific time of year to reassess your fees and implement adjustments.
Set your revenue goals, edit your fee calculator as needed
Review clients individually and adjust as needed
Create your communication plan & templates
Practice if you need to. Breathe, it will be ok.
Have client conversations.
Track your progress.
Relax and know you are being compensated for what you are worth.
About the Author
Arlene Moss, XYPN's Executive Business Coach, gets a kick out of helping financial advisors get over being overwhelmed and take on their frustrations so their businesses soar. Arlene works to ensure XYPN members are able to help their clients prosper while creating a sustainable business model. Through XYPN Academy and one-on-one coaching, members get the support they need to grow their businesses and overcome the challenges that come their way.
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