The price is right. Or is it?

“I have learned throughout my life as a composer, chiefly through my mistakes and pursuits of false assumptions, not by my exposure to founts of wisdom and knowledge.” Igor Stravinsky

Pricing means different things to different people. For some advisers, price is reflective of value added.

For these advisers, when they either save or make their clients money, they determine their pricing based upon the difference provided. For other advisers, price is reflective of effort. For these advisers, they price on the amount of effort, usually hours, provided to their clients.

The majority of financial advisers still price their services based upon the pricing options provided in the products they sell rather than the services they provide. When it comes to pricing services, our best clients know that there isn’t such a thing as the perfect price. Reinforcing the above Stravinsky quote, our clients know that their own pricing mistakes teach them more than their pricing “successes” – particularly if success is measured by the number of new clients, rather than profitability.

Their objective is to get their pricing less wrong than perfectly right. The perfect price is as elusive and mythical as the perfect investment strategy, or the perfect financial plan, or the perfect client. To support their desire to become greater “price-makers” rather than product “price-takers”, our clients are establishing their own pricing committees to assist them in determining how to price their services.

Not unlike investment committees, pricing committees aim to objectively oversee the logic, robustness and value of their pricing standards. Pricing committees are established by owners of advice firms who are seeking pricing independence from their product providers whilst wanting to objectively audit, assess and reduce principal dependency when make the pricing decisions.

Pricing committees have authority for the development and ongoing maintenance of the firm’s pricing models. Whether pricing is based upon products sold, hours worked, jobs performed, savings made or success fees, ongoing development and maintenance of an advice firm’s pricing models is a necessary, yet overlooked, task.

If the foundations of your pricing philosophy are still built upon what worked five years ago, it might be time for a re-think. An important role of pricing committees is the enforcement of a firm’s minimum pricing. Enforcing minimum pricing combats the financial adviser acting as a salesman to win the initial business at all costs.

Without minimums, price is often bent into a rapport builder between a prospect and a money-focussed financial adviser more concerned about getting the client’s funds under management (FUM) – or debt, or insurances, or commissions. Like investment committees, pricing committees aren’t designed to be consulted for every pricing decision, but their pricing models are expected to be used for guidance in all pricing decisions.

Pricing committees do meet regularly (at least quarterly) to review the models, consider the perennial pricing exceptions to the rules, to update the internal models and conduct irregular “pricing checks” on advisers to ensure pricing practice and pricing theory are aligned. The ongoing training and skilling in price calculation, price pitching and price presentation are also key responsibilities of a firm’s pricing committee.

Membership of a pricing committee should consider external input as it brings important accountability, objectivity and experience. In small firms, other membership should be limited to an adviser and a business management role. It’s necessary to ensure that the committee isn’t overweight with either sales focus or profit focus but aims to achieve a balance, with external input, between the two. In next month’s article we’ll share a number of pricing principles that have arisen from successful establishment and development of pricing committees by our clients.

There are a number of business reasons to reconsider how your firm prices its services. Our new Minister for Superannuation and Corporate Law, Senator Nick Sherry, has trodden carefully with our $1.2 trillion superannuation industry to date, but it would be foolhardy not to prepare for some big policy decisions within the next 12 months.

I’d also urge the investment product pricetakers to watch the current re-pricing of mortgage products between all major Australian banks and their distribution forces. When David Morgan left Westpac late last year, he nominated wealth management (read superannuation guarantee inflows) as one of the greatest opportunities for banking in a generation.

The banks aren’t going to let anything get in the way of their profits for shareholders. Start planning for when the banks inevitably trim the costs to get their investment products to market. Stravinsky is obviously right. These are the best of times to build pricing muscles by establishing your own pricing committees and to properly learn from inevitable pricing mistakes and challenges that our emerging advice profession will be built upon.