Finding Confidence To Differentiate On Advisor Value Instead Of Price
Financial advisors charge a wide range of advisory fees, which can vary based on everything from the depth and breadth of the advisor’s services, to his/her skills and expertise. Yet in recent years, there has been a growing level of criticism directed towards advisors who charge “above-average” fees, implying that doing so is a potential breach of their fiduciary duty to clients… with no regard to the fact that the advisor might simply have a more specialized level of expertise that merits those higher fees.
In fact, on a recent episode of the Financial Advisor Success podcast, we had Dana Anspach, who has a niche financial planning business with an incredibly well-defined process for serving retirees, that has grown from $30M to $130M of AUM in just the past 5 years. Yet rather than celebrating her success, many in the advisory community have taken to criticizing Anspach’s fee structure of 1.25% AUM plus an upfront planning fee of $6,900, on the grounds that it is too high for a fiduciary to charge when ‘everyone knows’ the typical advisory fee is just 1%.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss whether advisors who charge more than the average advisory fee should be criticized for not charging less, or admired for their ability to craft a clearly defined value proposition that is so compelling that clients are willing to pay those fees for the value they perceive!
First and foremost, though, it’s crucial to point out that the fiduciary rule does not require an advisor to be the ‘lowest cost” provider or charge no more than the average advisory fee in the first place. Instead, it simply requires financial advisors to charge fees commensurate with their services, that are “not excessive” relative to the going rate for similar services. Which means there’s nothing wrong with charging an above-average fee to deliver an above-average solution, as Anspach’s firm does with their unique, differentiated, specialized service for retirees.
In fact, the only ones who seem to be complaining about Anspach’s fee structure are not her clients (who appear to be finding good value in what her firm provides), but other financial advisors – who imply, or in one case outright said to me, “Why would someone work with Dana at 1.25%, when I offer retirement planning to my clients and only charge a ‘more reasonable’ 1%?”
The irony of the advisor making this statement is striking, given that as advisors we routinely urge our clients not to just shop based on price alone. We tell them to shop based on value. Not just the cost, but what you get for the cost. But shopping based on value means that reasonable fees could go in either direction – with advisors charging less, or more, based on the value they provide. Not to mention that from an advisor’s perspective, competing on price alone eventually becomes a serious problem for most advisory firms. In part, it is because competing on price alone attracts price sensitive fee-conscious clients, but the real problem is that when you compete just on price, you’re not competing on actual value and there’s always going to be someone who can figure out how to charge less than you.
Yet in recent years, more and more advisors are competing on price, either by focusing on how their fees are lower than the fees of other advisors, and/or trying to offer differ advisory fee models – for instance, annual retainers in lieu of AUM fees – as a means of differentiating based on price. Which suggests to me that the real problem is that advisors are continuing to struggle in figuring out how to effectively differentiate, and lack confidence in their own value proposition (and therefore feel compelling to compete by cheapening their pricing, instead).
And this is actually borne out in some of the recent research on how advisors set their fees, with Bob Veres’ recent study finding more experienced advisors charge higher all-in costs than those in their first 1-5 years, and our first XY Planning Network benchmarking study which found that 100% of financial advisors surveyed were raising their fees after their first three years of business – suggesting that as advisors gain confidence in what they do, they actually tend to raise their fees, even as they move upmarket and work with larger clients.
Ultimately, though, the fundamental point here is that when I see a growing number of advisors who snipe at the fees of other advisors, what it suggests to me is that there are a lot of advisors who still aren’t really confident in their own value. Instead of asking how they can focus, specialize, and build a niche that commands higher fees the way that firms like Anspach have been able to do, they ask why her clients wouldn’t just work with them instead since their fees are lower. But that entirely misses the point. Dana’s specialized niche adds more value to her target clientele, and can command a higher fee.
Which means in the end, if advisors want to bolster their pricing and value proposition to better attract new clients and grow their advisory businesses, they should be looking to emulate successful advisors, rather than criticizing their business success!
AUTHOR: MICHAEL KITCES
Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.
In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)