“So, can you tell me please how you charge”?

There’s a lot of work being done at the moment by financial planning firms in the Irish market in the broad area of charging for services delivered. Firms are reviewing the services delivered to clients and are working out how best to be paid for those services. This opens up a number of areas; fees v commission, how much to charge, how to charge, justifying charges etc etc.

We end up having lots of interesting and thoughtful conversations with financial planners that can be quite illuminating. When working with these firms on their Client Value Propositions, we spend quite a bit of time looking at the services delivered and how these are paid for. We are looking to develop the remuneration model of the future for the business. However as part of this, we want to understand the starting point – how the business is operating today in this area. To get clarity on this, we ask how the following question is replied to, when posed by a potential client,

“Can you tell me please how you charge?”

We get a quite a variety of responses!

 

We don’t charge

Yes, we have heard this one! This of course simply makes no sense. Nobody works for nothing, and clients have no expectation that you should work for nothing. Potential clients at best are simply confused by this answer and at worst are hugely suspicious of this answer. Where’s the catch? What am I missing? How can there be any value in what you are providing to me, if you are providing it for nothing?

Of all the potential responses, this one certainly takes the biscuit in terms of being the one to avoid…

 

You don’t pay us, we get paid commission

When advisers are being very candid, it’s apparent that this one is still trotted out quite frequently. For many of the reasons mentioned above, I have a real problem with this response. I also have a problem with it as it is simply not true. The customer always pays – fact. Without further explanation, this also positions the adviser as a price taker, and whose remuneration is solely dependent on the sale of a product. More suspicion for the customer – do I need this product? Why am I being sold this product etc.?

I am not for one minute decrying commission as a method of payment. It makes sense in so many situations. However that is the way it should be positioned – simply as a method of payment and not where the product is seen as the driver for you to be paid.

 

We charge 50bps on all monies invested

We’re moving into more positive territory now – at least with this response you have your own developed pricing approach. A thesis could be written on the differences and comparative benefits of AUM pricing v flat fees v retainers etc., but that is for another day.

The challenge I have with this approach is that it doesn’t make sense to me that all clients are charged the same amount. Because all clients are different and need and deserve different things and services.  Some clients need to meet you quarterly, some once a year. Many embrace cashflow, some don’t. Why are they all charged the same, when they place completely different levels of demand on your time and expertise?

I’m not proposing a unique charging structure for every client, but the approach below seems much more appropriate to me.

 

We charge based on value delivered

Can there really be any other approach? Clients seek the services of financial advisers today to help them address a very broad range of financial challenges. For some, they have a single, specific challenge. For others, they want to make better use of their financial resources or improve their relationship with their money. For others again, they want a very broad service around establishing life goals and then understanding what is needed to bring those goals within reach through careful planning.

All very different requirements and delivering different levels of value. How can you not charge differently for each of these?

 

How do you answer the questions “Can you tell me how you charge?”, and how will you answer it in future?

Different people want (and deserve) different things

How many clients have you? 200, 500 or 2,000? Often as your client base grows, it results in your number of staff growing. But the chances are that even with your increased staff numbers, you are unable (and unwilling) to provide a top-drawer service to every one of these clients…

Really the question is – why should you? After all, you derive hugely varying levels of income from each of those clients so surely the clients that are driving very high levels of income to your business deserve a higher level of service?

Of course this is not at all a novel concept! Every time you step on a long haul flight, it’s immediately obvious. Turn right for the cheap seats in Economy or turn left to be pampered in Business Class or 1st Class. And then when you book a hotel, you can pay less for a standard room or pay more for a suite with all of the bells and whistles that come with that.

Now let’s take this concept into the financial advice space where for many of you, your remuneration model is built around trail commission. If I’m fortunate enough as an investor to come to you with €1 million to invest, your trail commission might be €5,000 p.a. (assuming you charge 0.5% of assets). That’s fine if your proposition stacks up.

But what happens if I decide to place just €200,000 of my money with you? Now your trail commission falls to €1,000 p.a. Still very attractive, but obviously not as nice. However the question that’s in my head is, “What extra am I getting from you by placing the full amount with you, that’s giving you the benefit of an additional €4,000 p.a. of my money?”

If there is no difference between the services offered in each of these situations, I suggest you’ve got a challenge on your hands… Simply adding trail commission to policies without thinking through your client proposition is fraught with danger.

Not completing a robust segmentation of your clients is also very dangerous. Even without doing a segmentation exercise, I’ve no doubt that a small number of your high value clients get your best service at all times. But inevitably what happens is that there are other high value clients that slip off your radar. Either you don’t realise that they are high value or they just aren’t demanding. This is aside from some low value clients who are constantly on the phone end up getting a huge amount of attention. That’s hardly fair, is it?

So what do you do?

 

Segment your clients

For starters, do a proper segmentation exercise. Know who is valuable to your business and who is not. Don’t be put off from doing this work with the excuse of “it doesn’t capture the full picture”. Yes, there will always be exceptions within your segmentation – for example a client with very little business with you, but who constantly refers other clients to you is actually a high value client to you and should be treated as such. But don’t start with the exceptions; work out how to deal with them later on a case-by-case basis.

I’m definitely not suggesting that client segmentation be based on asset values alone – that is only one factor to be considered and used. However it is usually one of the more heavily weighted factors used by advisers in segmenting their clients.

 

Develop your service packages

Develop service packages for your business that reward clients depending on their value to your business. Make your high value clients feel really special, reward them for trusting you with their money by giving them a truly rewarding client experience. Build a moat around them and pull up the drawbridge from your competitors by providing a second to none service.

Let your mid-tier clients feel valued by your business, while making them aware that there is lots more you can do for them (if they are willing to pay for it).

And of course your no/low value clients will begin to realise that it’s a business you are running and that they don’t have 24/7 access to you. If they want access to superior service (ongoing advice from you), they pay more for it. The same as when they book a flight or a hotel room.

 

Don’t be afraid to say no

Yes, your lower value clients may want a better service possibly than you are offering and might try to demand it from you, without paying for it. Don’t be afraid to say no. You’ll only be doing this with your no/low value clients… And they are of little or no value to your business. Put your time into those clients that are of value to you – this is what your clients deserve and what your capacity allows.

The days of a “one size fits all” approach are over. Give your clients a service that they want and deserve.

What exactly is Lifestyle Financial Planning?

We have seen quite a significant movement over the last few years of Financial Brokers extending the services they offer to their clients, through the delivery of lifestyle financial planning. While this service may not be suited to every client, or indeed you cannot justify delivering it to every client, the shift is happening. This is because of the value that lifestyle financial planning brings to people’s lives and because of the deeper and more engaged relationships that develop between the Financial Broker and the clients that it suits. So what is it all about?

 

What is lifestyle financial planning?

Lifestyle financial planning consists of four main phases, and each of them in turn are required. The four phases are

 

1. Discovery

This is the phase that gets skipped over the most, which is a shame as this is the most important of all of the stages. This is the phase where the planner finds out the lifetime goals and ambitions of their client, where the client can visualise the outcomes in their own terms – the type of life that they will lead, the possessions that they will own, the impact they will be able to have on the lives of others, what they will do and achieve in their lives.

Until you know the answer to these questions, what are you planning for? Just building a pot of money with no idea of what it will allow your client to do?

This phase is carried out by careful and well thought out questioning by you. And then listening intently. It is not “airy fairy”, instead it is the most important conversation that you will have with your client as you get to understand their hopes and dreams

 

2. Planning

This is where the planner then uses his/her expertise to develop the roadmap for the client to get from where they are today, to achieving the life they visualised in the discovery phase. This is generally a comfortable area for Financial Brokers, where you can utilise all of your experience and technical skills to develop a plan for your clients. As a result though of the comfort at this stage, some brokers rush to it without properly completing the discovery phase – when that happens, you are no longer carrying out lifestyle financial planning.

Important also to this phase is the use of future cashflow planning. Without it, it’s not really lifestyle financial planning. When using this process you can demonstrate to clients if they are on track to lead the life they visualised, and if not what they need to do to get on track. You can show them the impact of unforeseen events and how to plan for them, the impact of changing goals and of course the actions they need to carry out, or products they need to put in place to achieve the plan.

 

3. Implementation

The most straightforward of all of the phases and an area that Financial Brokers excel in. This is where you assist the clients in carrying out the required activities (e.g. budgeting, wills, power of attorney) and where you put the required financial products in place that will play a role in achieving the goals of the plan.

 

4. The ongoing journey

This is again a really important stage that sometimes doesn’t get enough attention. Regular contact and scheduled meetings sit at the heart of lifestyle financial planning. The ongoing interactions turn the plan into a real journey towards the client achieving their lifetime ambitions. They are the opportunity to review and restate / change goals, review the progress and performance of the actions and products that were implemented and keep the client on track in terms of their behaviours with their money and their investments.

Without these meetings happening as scheduled, it is akin to pushing a boat away from the harbour wall to sail the stormy seas alone… You need to be beside your client at every turn, helping them to navigate their way towards their dreams. These review meetings also give you the opportunity to stay close to your client, and to gently remind them of the incredible value that you are bringing to their life.

Equally importantly, having a robust and valuable ongoing service also enables you to justify your ongoing charges to the client.

This shift towards lifestyle financial planning is to be welcomed. It increases the value of Financial Brokers in the eyes of their clients, provides a richer client experience and builds value in your business through easier justified ongoing charges.

How can you improve the value of your business?

We wrote last month about the different ways in which a potential buyer will look to value your business. This is a follow-up piece about how you might increase the value of your business, to ensure you extract the very best price possible. Obviously your recurring income is a crucial starting point. However a good business is about a lot more than a simple multiple of your recurring income. There are a number of ways ways that you can demonstrate additional value in your business, which will allow you drive up the price.

 

Work through all the valuation methods yourself

As set out last month, financial advice businesses can be valued using a number of different methods. The oldest (and simplest) model is the multiple of revenue model. However this is being replaced today in some cases by buyers using a multiple of the profitability of the business (usually excluding the business owner’s earnings) as this takes account of both revenues and costs within the business.

It is really important that you consider all of the potential valuation methods, as a purchaser most likely will do so! If a particular valuation method is proving very difficult in justifying the value of your business, are there changes that you can make that will improve the picture? Doing the calculations yourself and being prepared are really important to achieving the price that you want.

 

Drive up trail & other recurring incomes

Obviously there is no point just a year or two before you want to sell up, to really start trying to make the switch from upfront commissions to the flatter income structures that are far more prevalent today. A purchaser will want to see a steady and increasing recurring income stream over a prolonged period. If a sale of your business is on the horizon at all, now is the time to start making that shift to increase your recurring income stream – the StepChange “Getting to 1%” programme could really help you here!

 

The persistency of business is crucial

Of course the size of your business is a main factor. But so equally is the persistency of your revenue. Lapse rates have become a major issue for life companies and advice firms alike, so obviously persistency will significantly impact the price someone is willing to pay for your business. There is little value in a firm that can’t demonstrate an ability to build up a durable revenue stream.

There are a number of steps that you can take to help address any purchaser concerns in this area. Preparing the ground for an effective “earn-out” period will really increase the confidence of a potential buyer – one of their concerns will be your commitment in this area. Also reducing the reliance of clients who seek to deal exclusively with you will also help. If you can demonstrate that clients deal with your business rather than just you, a buyer will feel more confident about those clients staying with the business.

It is also worth looking at the remaining advisers in your business. Having them tied into solid contracts with clear non-compete clauses should they leave, will again help you in your negotiations with a buyer.

 

Have a winning business proposition

A buyer will want to believe that he or she is getting more than their money’s worth when running the rule over your business. A very compelling business proposition will help to provide this comfort. For example, this may be strengthening the buyer’s position in their chosen market or indeed giving them access to a new market. It may be a unique expertise that your business offers or strength in attracting a particular target group of clients. A strong position within a niche market can be a very attractive proposition! If you own a brand that is really well known in an attractive target market, this is a very valuable asset. However on the other hand, if you’re not clear about what’s unique about your business and be able to demonstrate this, you cannot expect a prospective buyer to see this potential.

A buyer will also want to be purchasing clients who are engaged by and committed to your organisation, and are likely to stay with the firm going forwards. To achieve this, you’ll need to ensure that your processes for ongoing client engagement really stand up to scrutiny.

 

Your service and compliance systems are very important

Potential purchasers also want to minimise the headaches involved in a purchase. They want to buy a well-run business that looks after its clients in a professional and engaging way and is compliant in everything that they do. In fact better still, they want to buy a business with potentially better processes and systems than their own, that they can then leverage for their now expanded business. There’s a real opportunity to make your business more attractive to a buyer through utilising excellent business processes.

 

Your people are the heartbeat…

While your clients are at the core of your business, your own people are the heartbeat of it. They have the strong relationships with your clients, the expert skills that potentially are sought by a buyer and the capability to deliver brilliant service to attract and retain your clients and valuable income stream. A highly skilled, cohesive team is an enormous asset when selling.

 

These are just some of the factors you might think about as you prepare your business for a potential sale. If you have any comments in relation to the above or indeed can identify any other factors, please leave your thoughts below.

What’s the right fee structure for you?

Trail commission. Is it the silver bullet that enables Financial Brokers to be paid for the value they add, to build value in their businesses and eventually sell the business at a healthy multiple? Or is it a somewhat opaque way for advisers to be paid, sometimes with very tenuous links between the value provided by the adviser and the payment received?

Trail commission is far and away the most popular method of ongoing fee collection today. First of all it’s relatively easily explained. Clients understand it. And of course trail is very easily collected. Clients don’t have to write another cheque, which is always a potential hurdle. Clients also see a level of alignment of interest – if the portfolio sees strong growth, both the client and the adviser win. Also there is no VAT payable on trail commission, that will apply to retainers and fees if the adviser’s fee based turnover threshold for VAT of €37,500 is exceeded. This is good news for personal clients.

For the adviser, trail makes a lot of sense. It’s the most used factor in advice firm value calculations and trail tends to naturally increase each year in line with portfolio growth, and as new contributions are paid into investments and pension policies. Very importantly too, it doesn’t tend to dominate review meeting conversations. Many advisers have moved to Modular AUM-based Pricing, which is where prices are linked to AUM, but then varied based on the level of service. This has become very popular in Ireland, as the focus of the conversation shifts from the price paid to the value added.

But trail is not perfect. As we see asset management fees fall dramatically in some markets (note Fidelity’s recent announcement of zero charge funds – yes, you read it right!), trail levels will come under a lot more scrutiny. In any case, some advisers (and/or their clients) already baulk at the idea of their remuneration being based on the client’s asset levels rather than the value provided. This might be where fees come in.

 

How do you structure a fee?

I am often asked this question by advisers who have decided to go down the fees route, usually just for a segment of their clients, but on occasion for their business as a whole.

There are of course many different ways of structuring fees – below are listed some of the most common structures used in Ireland and/or in other markets. Of course each of them has their merits and drawbacks, but hopefully this list will help you identify one or more structures that suit you and your business. First of all, the most common structures are,

  • A fixed rate for each service (plan preparation, annual review service etc.). These rates can differ for different levels of complexity associated with different clients.
  • The “McDonalds Menu” approach of bundling services together into service packages, and then charging different fixed fee levels for different service packages.
  • A monthly retainer

Some advisers are now combining one or more of these, including combining them with trail commission. The most often used combination is a fixed fee for preparation of a financial plan alongside modular based trail commission or a retainer for ongoing services.

Other less often used structures include,

  • Hourly charging – rates are quoted by lots of advisers here, but few actually end up using this basis…
  • A model used by advisers in some markets aimed at millennials and others with low asset levels but often high incomes, is advice fees linked to the client’s income and net worth, instead of to AUM.
  • A subscription model based on client preference and personality. A client who is a “delegator” pays more than a client who is simply looking for validation of their own decisions, who in turn pays more than a DIY client who simply wants help with product execution.

As you can see, there are many different bases that can be used, and often the preferred structure is a combination of different structures. The challenge for you is to identify the model that fits best with your own client proposition and that reflects the value that you are adding.

How do you approach increasing your fees?

One of the areas of greatest challenge for financial planners in Ireland today is increasing the level of your fees / trail commission from the levels that you are currently charging. But time marches along, and often when you actually turn to really examining the issue, many advisers find that their charges haven’t increased at all in the last 10 years! There are very few other professions where this would be the case.

The comments that I hear are,

“It’s all well and good that UK & US advisers charge 1%, as their asset management fees are so low” 

and “You can’t charge more than 0.25% / 0.5% p.a. (or fees of €1,500 / €2,000 p.a.) and justify it”.

However, there are growing numbers of Irish advisers that do charge more and their clients happily pay more. So how do they do it?

 

Their proposition stacks up

Please note, this article is not about the merit of trail v fees, that’s a whole other conversation! For the purpose of this article, I’m simply going to call them both fees.

Advisers that attract higher levels of fees tend to have superior propositions. They have put a lot of time and energy into really thinking through their client proposition and the value that clients experience from working with their firm. There’s no grey in the proposition – they are crystal clear about all of the value areas.

When this work is done properly, very quickly all of the new areas of value that you provide become apparent, and you see where your proposition has grown and how you provide more value today than you did when your fees were set. All of this added value at no extra cost (currently)…

Once you start to clearly identify these areas of additional value, you’ve taken the first step to increasing your fees.

 

They actively communicate their value

This is often the area of biggest challenge, particularly with existing clients. Actually having that conversation with a client about the value being added. It’s always easier just to talk to the client about their financial plan, their cashflows and their policies – it all feels a bit “American” to have a chat about the value being added!

But if you don’t have this conversation, all you can do is cross your fingers and hope your clients see the value they are getting…

This conversation has to be highly structured (by you) and very well practiced. You need to be able to clearly demonstrate that you’re not just “winging it”, hoping to increase your fees on a case by case basis. Instead by clearly articulating the services that you provide, the value derived from them and the cost of them, clients can see what they are getting for their fees.

From experience, this tends to work best when advisers offer multiple (2 or 3 usually) service packages. The higher value packages show the increased services being offered for the higher fee levels. Also if a client is not willing to pay a higher fee level, they clearly see the services that they won’t be getting.

 

They justify their fees

The communication is critical, but a slick sales pitch is not enough! Advisers who charge higher fees clearly justify those higher fees. This is achieved through providing a range of evidence,

 

  1. A statement of financial improvement is where you demonstrate to your client the actual € value of your advice – this might be in a net worth statement, portfolio increase, tax saved, costs saved or other such metrics
  2. A client calendar of all the interactions that you carried out with / for them over the last 6 or 12 months such as the meetings you had, the phone conversations, the newsletters you sent them and the events you invited them to etc. Not forgetting of course the updates to their plan and cashflows, the portfolio rebalancing and ad-hoc service requests.
  3. Timesheets are provided by some advisers to demonstrate the level of work carried out on the client’s behalf and providing a justification of fees in the process.

 

When you start pulling all of these strands together, it can seem like a lot of work to be undertaking. However the prize is huge! You will quickly realise the value you’re adding and this will give you increased confidence to have that conversation about higher fees with your clients. They see the fantastic value they are getting from working with you, while you earn more in the process. A win-win situation!