If a client asks you how much you’re going to charge them next year, what is your answer? Probably it’s something like: “It depends”.
It may depend on what services the client needs over the course of the year – but it might also depend on whether you charge a fee for service or you charge an asset-based fee.
In the case of the former, if a client asks “how much?” you can probably set out for them indicative fees, for a range of services. There may be an annual retainer that includes a review meeting. There may be a schedule of fees for different types or levels of service on top of that. But the absolutely critical point is that if the client doesn’t use a service, they won’t pay for it. You can quote something, couched in actual dollars, that is reasonably accurate – and something that will reflect the reality of the services they eventually need or use.
No control
In the case of an asset-based fee, you can’t have a conversation like that as easily, or at all. For one thing, you have no control over the fee you charge. You cannot know over the course of a year what the value of the clients’ assets will be each month or quarter (or whenever the “fee” is calculated). So you can’t quote an accurate dollar figure for even a basic level of service.
An asset-based fee means that if the value of the client’s assets rises, the client pays more – but pays more for what? You may or may not have provided additional services for the extra dollars paid. But the increase – or indeed the decrease – in the dollar amount paid by the client is not explicitly linked to the service provided.
Quoting a percentage of assets is not the same as quoting a fee for a service. It is not quantifiable in dollar terms ahead of time. It does not allow you as a professional to set out a schedule of fees for a range of services. The fee varies according to factors outside your control. And the client is unable accurately to compare the services and the costs between planners. Perhaps that’s the intention.
Glorified salespeople
This argument is based on an assumption that financial planners want to be perceived as professionals, and not as glorified salespeople. There’s a big difference, and no less a legal mind than the former Chief Justice of the High Court of Australia, Sir Anthony Mason, said as much only a couple of weeks ago.
Sir Anthony noted that financial services is “an industry whose principal purpose, as its name implies, is to provide services rather than to sell products”. [Professional Planner’s emphasis.]
“Advisers are professionals,” he said. “Salesmen, no matter how successful they may be, are not professionals.”
In other words, salesmen sell things, and professionals provide services. And that’s why it’s is critically important to the development of a financial planning as a profession that the fees its professional practitioners charge are based on services provided, not on some percentage-of-assets figure which may or may not cover the actual services provided.
And they certainly should not be based on some factor outside the professional’s ability to set and control – particularly a factor which is, in any case, predicated upon a financial planner providing a predetermined form of advice.
It’s not only about time
While we’re at it, let’s just kill off one particular myth about Professional Planner’s position on fees.
There’s an assumption that when we talk about alternatives to asset-based fees we must automatically be advocating hourly fees or time-based fees. Let’s be clear: we do not mean that at all. We are not advocates of any method for charging fees other than those that decouple the quantum of the fee from the value of the client’s assets, and link the fee instead to the actual delivery of professional – as well as definable and quantifiable – services.
The price of such a service is then based on the professional expertise and experience of the financial planner, and on the cost of delivering a service plus a healthy profit margin.
Time is merely one input into the calculation of a fee. There are others.
Fees are for services
And just to put another one to rest, we’re not advocating a one-size-fits-all fee for financial planning services, either. A financial planner should charge whatever fee is appropriate for a given client. Complex advice should command a higher fee than simple advice for the very basic reason that providing complex advice requires a higher level of expertise – and that’s what the client is paying for.
Yet under an asset-based fee structure, there is no definitive link between the advice needs of the client and the amount they pay. A client with complex advice needs might even pay less than a client with simple advice needs, just because their assets are worth less.
Then you run head-first into the question of how to identify which clients are profitable, and which are being subsidised by your profitable clients.
And if you don’t think that’s important, how do you know which sort of client you should retain, or find more of? Just focusing on those with big portfolios and high asset values isn’t a good guide, because that metric on its own provides no insight at all into the complexity of their advice needs.
How much do you think a potential buyer of your business will pay, when that time comes, for unprofitable clients?
