After reporting that 85 per cent of clients were mispriced at Professional Planner’s Best Practice Forum last year, Peloton Partners consultant Rob Jones is still convinced financial advisers are selling themselves short.
Speaking on the Principals in Practice podcast, Jones said regulatory change and a roll-back on subsidisation have rapidly altered the cost to serve. This has forced advisers to change the way they charge for their services, but these changes have often come through without appropriate pricing research being conducted.
“I said 85 per cent of clients are priced incorrectly but it’s gone higher than that,” he said. “The number is actually way higher, it’s over 90 per cent.”
Most client pricing is not generating an appropriate return, Jones explained, with “errors across the board” meaning the value of advice is rarely matched to the right level of recompense. But the issue can’t be solved by simply charging clients more.
“There are huge numbers of clients that are paying a lot more than what they actually should be as well,” he said. “So it goes the other way too.”
A truer position
Fortnum Financial chief executive Neil Younger believes advisers are actually getting better at pricing appropriately for their services, with rapidly changing market dynamics forcing practices to hone their pricing methodology.
Joining Jones on the podcast, which is produced in partnership with BlackRock, Younger said he agrees that advisers “still have a way to go” but sees a lot more improvement in the sector than the consultant.
“I think Rob’s observations are based a lot on a comparison against the methodologies that he puts in place with planners,” he said. “In the main, I’m seeing advisers progress really well in terms of appropriate pricing.”
Driving that progress, he said, has been a sharp pull back in subsidisation across the advice value chain. For years advice practices benefitted from commission receipts or the backing of banks that were willing to run advice at a loss to facilitate vertical integration, which masked “a degree of inefficiency”.
“You’ve now got a more realistic or true position of the costs within financial planning practices,” he said, noting that licensees have also been forced to make similar adjustments as product subsidies have been cleaned out of their operating models.
“Licensees that have also grown up, in that sense, in the marketplace and had to stand on their own two feet without themselves having subsidisation as part of their business model have also had to have a better understanding of genuine cost to serve and how that applies.”
Flexing on the right notion
There is no silver bullet to putting an appropriate pricing schedule in place for the delivery of financial advice, Jones said. “It takes months.”
The consultant outlined a three-step process required to get to the right pricing structure for a firm; pull apart the financials to get a five-year view, assess the “elasticity and capability” of the service being provided and then go “very, very deep” on individual client profiles.
The provision of advice should ultimately be based on complexity, he said, rather than funds-under-management.
“I get annoyed… most pricing models that I see still flex around the notion of how much money someone has to invest,” he said. “And yet, the layers of the client profiles and the issues of the client profiles are quite extraordinary.”