Stay Ahead of the Curve: The Benefits of Charging a Flat Fee – Part 2 of 2

If you missed Part 1 of this article, please send a request to info@billbachrach.com and we will send it to you.

Part 2:

Here are some examples supporting my belief that the new normal will be a flat fee for advice and could be mainstream soon.

• RIA only firms growing rapidly
• Broker/Dealers going from accommodating advisors who want to be fee-only to actually supporting them.
• Fee broker dealers. There are now b/ds that charge a fee for their support rather than a % override of your production and receive no compensation from the product providers on your sales.
• The proliferation of services like “RIA in a Box” to help advisors make this transition.
• The proliferation of no-fee / no-commission annuities and insurance products with all the features of fully loaded products. While these have long been available on a smaller scale and with fewer features, they are going mainstream. It seems the insurance and annuity companies are recognizing the market potential of the RIA and flat-fee-for-advice model.
• The continuing advisor mindset shift from gathering assets and being investment focused to giving advice about achieving goals and getting your entire financial house in order.
• An insurance company owned b/d recently hired me to help them convince their most successful advisors / agents that they should convert their business to flat-fee-for-advice and to teach them how to do it. Read that again: an INSURANCE company owned b/d…
• Australia and other countries whose governments are mandating a fee-for-advice model. Instead of having government agencies police the potential conflicts of interest and inspect for full-disclosure they are “solving the problem” by simply eliminating conflicts. The solution? Progressively eliminating commission and fee compensation based on products and requiring that advisors be paid directly by their clients for advice. Their rationale is that the client and the advisor should work out how valuable their advice is and set the price rather than that being determined by the product / service providers, thereby forcing the client to figure how much their advisor is being paid through some combination of advisor disclosures and reading complicated legal documents, like prospectuses. In other words, “tell me what you’ll do for me and how much you charge and if I agree I’ll pay you for it.” One of their goals is to eliminate any financial person ever again saying something like, “you really don’t pay me anything, the product provider we choose pays me.” You can read more about this at http://futureofadvice.treasury.gov.au. Similar things are happening, or have happened, in the UK and other countries. I am not predicting that our government will intervene in the same way. I believe that market forces will drive this change here. Just as 1% of assets became the new normal for compensation I believe it will be replaced by the next new normal of a flat fee for advice.
• The word is beginning to spread that financial services could be a fixed-cost business, not basis points. Similar to Schwab figuring out the that people with bigger stock trades don’t have to pay more to sell or buy, money managers are acknowledging that there is little, if any, difference in the work involved to move $10m or $5M or $1M into the markets. Therefore, they are setting themselves up to be paid a fixed, flat fee to manage the money instead of basis points on the assets. Some insurance experts are doing the same thing.
• The recent economic downturn and market decline caused many advisors to realize that it doesn’t make sense for the fee and their income to fluctuate based on market or economic events. Clients need, and are willing to pay for, their advice in all economic cycles.
• Wealthier clients are beginning to grumble about feeling gouged by an asset fee that requires them to pay more for the same service just because they have more money. “If it doesn’t cost any more to manage my $5M portfolio than it does to manage a $1M portfolio, why am I paying so much more?” It’s a good point. Your challenge, if you are a %-of-assets fee-based advisor, is that if another advisor comes along and tells your client about a flat-fee-for-advice model that provides the same or better value at the “new normal” price before you do, it could create a trust breach between you and your client. Wealthy people don’t mind paying their fair share, but it irritates them when they discover that they are paying more to subsidize the people who pay less. Are your clients with more money subsidizing your business so you can afford to serve clients who pay you less?

Here’s a script for talking to your clients if you choose to transition to a flat fee for advice: “Based on how the financial services business is evolving we believe that you are better served by paying a flat fee for our advice and service rather than a percentage of your assets. We do so much more for you than just investment management and we believe the way you are paying us no longer reflects the value we provide. So, today we are going to review every element of the service we provide for you and propose a flat-fee for our service instead of variable % of assets.” Explain what you do, the value to them, how much you will charge for this value going forward, and answer their questions. For some clients the fee may go down and for others the fee may go up. What’s important is the fee for everyone is right-sized and the value the client receives exceeds the fee.

How do you set your fee?

Do the money math and decide how much total business revenue you need in order to cover your business expenses, pay your taxes, and have plenty of personal income to pay for your present lifestyle, get your own financial house in order, and fund your future goals.

Do the time math: How many clients do you want to have and how many do you actually have time to serve given your desired number of work days / year and work hours per day. Hint: you can only deliver truly comprehensive financial services for 100 or fewer clients.

Divide your required business revenue by the number of clients and that equals your minimum fee. Then consider the value-based method for setting your fee. In other words, what is the value of this service for the people to whom it’s being provided? You may only need $10,000 / client, but the value may actually be $20,000 for your ideal or target client. In that case, I recommend that you set your fee at $20,000 and reduce your target number of clients. You make all the money you need to run your business and make your life work and have more time (which is much more valuable than money) to live an even better life.

Why does this matter to you? Because when you proactively transition to a fee for advice you will create greater client loyalty with your existing clients and easily “steal” clients from other advisors and institutions who are slow to adapt.

The HUGE opportunity for the flat-fee-for-advice advisor is to present a better value proposition at a lower fee. The result will be some clients transitioning all of their financial services business from their current relationship(s) to you. Simply put, you can deliver a better value proposition (truly comprehensive financial services) very effectively for, let’s say, $20,000 / year. Anybody paying more than that as a % of assets and basically getting just asset management and a few other services is the perfect candidate to hear the message of how much more value they could be getting from you for the same or lower fee. You were looking for a way to get higher net worth clients in this economy? Now you have it, but this window of opportunity may not be open for long.

If you missed Part 1 of this article, please send a request to info@billbachrach.com and we will send it to you.

Posted in Building Trust, Success Principles by Bill Bachrach.