Fig­ur­ing the Right Price

Af­ter five changes to my pric­ing model in five years, I ul­ti­mately re­turned to a strat­egy I had shunned when I started.

Financial Planning - - CONTENTS - BY DAVE GRANT

Af­ter five changes to my pric­ing model in five years. I ul­ti­mately re­turned to a strat­egy that I had shunned when I started.

The big­gest change in my prac­tice since I opened in 2013 is pric­ing. It’s not just me — most new RIA own­ers have gone through at least one pric­ing it­er­a­tion. But why are pric­ing and ser­vice mod­els so hard to fig­ure out? When I opened my prac­tice, one of my main goals was to get away from the AUM pric­ing model. At my pre­vi­ous two em­ploy­ers, that ac­counted for the lion’s share of rev­enue. How­ever, both firms had turned away clients who wanted to pay by the hour as it wasn’t a ser­vice they wanted to of­fer. I never fully un­der­stand this as there were hourly plan­ners in our geo­graphic area who were mak­ing it work. And we were say­ing “no” to peo­ple who had money to pay for guid­ance. As I left the sec­ond RIA, I was de­ter­mined to fol­low a ser­vice model that didn’t in­clude AUM. I wanted to work with those who needed guid­ance but may not have sig­nif­i­cant as­sets to man­age. So I started a prac­tice of­fer­ing hourly and on­go­ing-re­tainer plan­ning. I had to face sev­eral ques­tions: How would each of these ser­vices mod­els be priced? What was my time worth per hour? What would some­one be will­ing to pay per year for my ser­vice, but have that pric­ing bro­ken down into monthly pay­ments? I don’t dwell on de­ci­sions too long so I de­cided to make it some­thing easy to re­mem­ber. This was for my own sake in mar­ket­ing and prospecting, but also for con­sumers who may be com­par­ing mul­ti­ple plan­ners.

What Did and Didn’t Work

I went with a “$200 per hour and $200 each month” model and stayed with this for 12 months. Peo­ple could ei­ther pay per hour or per month, re­sult­ing in a $2,400 per year on­go­ing fee. Af­ter my ini­tial 12 months, I found var­i­ous sit­u­a­tions where this didn’t work. First, some clients worked through a fi­nan­cial plan with me and fin­ished the en­gage­ment af­ter six months. A com­pre­hen­sive fi­nan­cial plan for $1,200 — what a bar­gain! Af­ter this, I in­sti­tuted a 12-month min­i­mum con­tract. Then some clients came along with sig­nif­i­cant as­sets. At other firms, an on­go­ing re­tainer would cost them $5,000 to $10,000. They re­al­ized the bar­gain they got with me and signed up im­me­di­ately. I also knew what a bar­gain it was, so I de­cided to im­ple­ment a tiered re­tainer struc­ture where pric­ing in­creased as as­sets in­creased.

Gain­ing Trac­tion

At var­i­ous as­set lev­els, pric­ing in­creased from $200 to $500 per month. But for clients who hit those lev­els, it be­came hard to jus­tify that pric­ing af­ter the ini­tial year and the ma­jor­ity of the heavy lift­ing was done. I then went back to $200 per month but in­tro­duced an ini­tial plan­ning fee — first of $1,000, and then in­creas­ing this to $1,600 six months later. My hourly pric­ing turned to project pric­ing and turned into pack­ages for dif­fer­ent client needs. As my

I was not pre­pared for the feel­ing of self­ish­ness or guilt, but I had wanted to help those who needed guid­ance.

prac­tice strug­gled to gain trac­tion, I re­branded and started tak­ing re­fer­rals from a CPA, which meant do­ing AUM. As I en­tered the most re­cent cal­en­dar year, I in­creased my prices, got rid of my 12-month min­i­mum, and made my ser­vices sim­i­lar to that of the com­pa­nies I had left al­most five years ago. My pric­ing and ser­vice model has evolved more than five times in the space of five years. I have learned in talk­ing with other plan­ners that this jour­ney is not un­com­mon. Many start out with low pric­ing to get clients in the door only to find some ser­vices do not pan out or pric­ing needs to be in­creased. Others have low con­fi­dence so they price them­selves lower only to find them­selves be­ing able to raise prices once they have some clients and years un­der their belt. Another fac­tor is chang­ing the firm’s ideal client. Pric­ing needs to re­flect their fi­nan­cial and life sit­u­a­tion so pric­ing and ser­vices ad­just up or even down­ward.

Look­ing to the Fu­ture

Not want­ing to go through this ad­just­ment again for a long time, I de­cided to de­sign my pric­ing and ser­vices based on the clients I want 10 years from now. As just over 60% of my rev­enue is now re­cur­ring, it has pro­vided an income cush­ion mak­ing this eas­ier to do, but it still doesn’t calm my fears com­pletely. It led me to re­flect on what clients I de­sired, how my ideal prac­tice would be de­signed, and my per­sonal income needs. I was sur­prised by how many knock-on ef­fects that tweak­ing my pric­ing and ser­vices were creat­ing and how it was chang­ing the out­come of my busi­ness and per­sonal life. As I re­flected on this, I de­cided I wanted to work with a small group of clients pro­vid­ing high-end ser­vices (fi­nan­cial plan­ning, in­vest­ment man­age­ment, and income tax re­view or prepa­ra­tion) and charge a min­i­mum of $10,000 per year do­ing so un­der an AUM model. I would be happy to work on one-off projects for other clients, but if they weren’t el­i­gi­ble for this $10,000 min­i­mum fee, then I wouldn’t be pre­pared to work with them on an on­go­ing ba­sis. This would al­low me to cap the num­ber of on­go­ing clients at 20 to 30. This income would al­low me to hire a vir­tual staff, have income to sup­port my fam­ily’s needs, and free up time for pro bono work. Some­thing strange hap­pened in the fi­nal­iza­tion of this de­sign: It was, and still is, far re­moved from the ini­tial model I had built. I was not pre­pared for the feel­ing of self­ish­ness or guilt but I had wanted to help those who needed guid­ance and who may not have had the money to pay an AUM fee. And in build­ing a new de­sign, it made it hard to gen­er­ate sig­nif­i­cant and re­li­able income. There is a rea­son many firms have min­i­mums or only charge AUM, and while it’s taken me some time to re­al­ize it, these firms have the abil­ity to scale (if de­sired) and take ad­van­tage of in­creas­ing stock mar­kets to in­crease rev­enue with­out need­ing to find more clients to gen­er­ate more rev­enue. It’s also be­come ap­par­ent that new prospects seek­ing out my firm are at­tracted to the new pric­ing. They see the value of a higher min­i­mum and an ex­clu­sive ser­vice model. They know that the pric­ing of an ad­vi­sor de­liv­er­ing com­pre­hen­sive plan­ning and life plan­ning ser­vices isn’t go­ing to be cheap but they are ac­cept­ing of the fee schedule. They don’t want their ser­vices to be priced on the low end of an in­dus­try scale as they re­al­ize that de­tailed knowl­edge, ex­pe­ri­ence and dili­gent work will re­quire higher com­pen­sa­tion. But should all own­ers go through the same process as me, it­er­at­ing nu­mer­ous times? I think some it­er­a­tion is fine, but there needs to be some de­lib­er­ate de­sign based on the fu­ture de­sired clien­tele. I think new own­ers and plan­ners need to get clients in the door in or­der to fine-tune pro­ce­dures and ser­vices.

The ‘Ideal Client’ Fee Model

Once this has been done and a com­fort­able level of re­cur­ring rev­enue has been es­tab­lished, then an “ideal client” fee model should be es­tab­lished. While this may be vastly dif­fer­ent from the current struc­ture, it al­lows for a level of cer­tainty in prospecting, know­ing that each new client will be ad­her­ing to a ser­vice and pric­ing model that will re­main steady for a long pe­riod of time. I would en­cour­age newer ad­vi­sors to not change their mod­els if they see they are leav­ing money on the ta­ble. Un­der­stand that some clients will pay more, and some will pay less. Some may re­ceive more than what they pay for, and others will seem easy to ser­vice in re­gard to the rev­enue they gen­er­ate. Build a pric­ing and ser­vice model that is ap­pro­pri­ate for your ideal client but also com­ple­ments what you see your RIA be­com­ing in the decades to come. The rest will take care of it­self.

I would en­cour­age newer ad­vi­sors to not change their mod­els if they see they are leav­ing money on the ta­ble.

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