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Asset Based Pricing
With Halloween just behind us, I’ve picked a scary topic to discuss; asset based pricing!
From the industry events I’ve attended over the last twelve months, everyone seems obsessed with the FCA hunting them down for charging asset-based fees (particularly 1% of assets under management). Others are convinced that clients won’t continue to pay this level of ongoing fee, or think that this level of fee isn’t good for the client. I’ve had some ‘spirited debate’ with people on blogs, websites and in the Twitterverse.
All this perceived fee pressure has created a ton of debate about alternative fee charging methods such as flat fees, hourly rates or even charging a lower percentage based fee.
Let me state point blank; I’m all for different methods of charging, as long as:
It works for both the client and the business
It is not merely a discount under the guise of ‘creative pricing’
From what I’ve seen in the marketplace, this is rarely the case. Usually the new pricing structure works better for clients, but not for the business and is really just a discount in reaction to perceived pricing pressure. This is a serious error, in my opinion.
If you’re feeling some pricing pressure you need to ask yourself: “What’s the real issue?”
I don’t believe the FCA are into price-fixing, nor are they ‘coming after you’ if you charge asset based fees.
Whatever basis you are charging on, the real issue is your value added compared to your fee. Adding value is an issue of skill, knowledge, experience and communication.
So what should I charge?
Clearly, it depends on what you do.
If all you do is manage clients’ money, don’t charge too much for it. The value added is relatively modest and anyone who’s buying investment-only services is likely to be more price-sensitive, because they know that every pound they pay to you, the investment managers and the custodians is a pound off their return.
However, if you provide a genuine lifestyle financial planning service that helps clients clarify their life goals, shows them visually the impact of their decision making and provides a robust investment management proposition whilst doing it all in a tax efficient manner, then you can charge a premium price. By ‘premium price’, I mean either 1% per annum of any assets being managed, a large flat fee or a high hourly rate (although I am not a fan of the hourly rate).
If you’re not sure which camp you fall into, then try taking our quick quiz in the box below: Should I Be A 1%-er?
Charging based on assets under management
All advisers, no matter what business model they adopt, have the investment piece at the heart of the business model. It’s not called Wealth Management, or Financial Planning for nothing. There has to be some actual wealth to manage.
I know there will be some outliers or exceptions where managing the money isn’t central to a particular client. In these instances, advice can still be provided and a flat fee model would work just fine. However these are exceptions not the rule for most advisers. So let’s not throw the baby out with the bathwater in terms of pricing, just to appear whiter than white; it’s not required. Just do a great job for the client and what you charge becomes much less important (to you, the client and the regulator).
I always think in terms of buying a Ferrari. You wouldn’t pay £500,000 for a Ferrari engine. Its the whole package that makes it appealing; the shape, the interior, the smell, the sound, the way it drives. Yet without an amazing engine under the bonnet you wouldn’t pay £500,000 for the rest of the packaging on its own either.
If you think of the investment management piece as the engine in your proposition the same rules apply. On its own it’s not what people are buying, but it is central to delivering a great long term outcome for the client.
There’s Work Involved
To get your business in the kind of shape that is worth 1% pa requires a lot of work and (in my opinion) it demands more than just investment management to be considered good value for clients.
When you see the industry press, the regulator and others talking about downward fee pressure, you need to understand where you sit on the value scale. If you’re one of the firms delivering maximum value to each and every client then you needn’t worry about it. However, if you are one of the others I’d be very worried. Just being cheap won’t save you in the long run.
Quick Quiz: Should I Be A 1%-er?
Rate your answers as follows:
No, never.
Sometimes, on the odd occasion.
Yes, quite often.
Most of the time.
Yes, always.
I put the client’s interests before my own every time. 1 2 3 4 5
In my career I have waived a fee or refunded money to a client (without the involvement of a regulator or ombudsmen) when I (or my firm) has made a mistake. 1 2 3 4 5
My primary focus is on helping clients to live life to the full (as defined by the client themselves). 1 2 3 4 5
I ask searching and interesting questions when new clients come in for a first meeting. 1 2 3 4 5
My ensuing advice focuses primarily on the answers to those questions and I make recommendations that will resolve the issues identified in the questioning. 1 2 3 4 5
I help clients structure their affairs tax effectively. 1 2 3 4 5
I try to work collaboratively with other professionals (e.g. accountants, solicitors) that already work with the client. 1 2 3 4 5
I will recommend that a client changes one of their professional advisers if I believe that professional’s work is not up to scratch. 1 2 3 4 5
I build a cashflow model for the majority (more than 90%) of clients I work with? 1 2 3 4 5
I politely remind clients of any value I have added each year at the annual planning meeting. 1 2 3 4 5
Your Score ________
Less than 23: An urgent look at your business model is required. Get some external help. Right now!
23 – 30: Lots to work on here, but don’t lose heart. If you want to improve you can. Roll up your shirt sleeves and get some external help to knock you into shape quickly.
30 – 38: Not too bad, but plenty to work on if you want to blow clients away with your service and charge (or maintain) a premium price.
38 – 45: Well done, you’re in pretty good shape. What can you work on next to move on up to the elite level?
45 – 50: You add the value my friend, and you know it! Please charge a premium price for what you do. (If you need some assistance with this, read our last blog about increasing your prices!)