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Insights and best practices for successful financial planning engagement
• Joe Buhrmann • August 17, 2021
As the financial advisory industry shifts towards a planning-led business model, the popular AUM-based fee is becoming less applicable. While charging based on AUM decades ago freed advisors from being tied to commissions and product sales, allowing them to focus on ongoing relationships and advice, it is giving way to simpler, more transparent, more accessible fees for planning as a service.
Many financial professionals are now faced with the challenge of attributing a value and price point to something as intangible as financial planning. Firms have experimented with many different ways to structure a fee that easily translates to the value being delivered with a financial plan. While no clear favorite has emerged, one thing is certain: There is no single right way to charge financial planning fees.
How you and your firm decide to price your planning fees comes down to what you base your value on, how you calculate that value, and how you collect your fees.
What is a financial plan actually worth? It may not be immediately apparent if you’re charging based on AUM, but most firms that charge planning fees use one of four different approaches to determine the value of a plan.
1. Fees based on a financial professional’s time: One of the most common ways to set a financial planning fee is by determining what a financial professional’s time is worth in relation to the desired revenue to be generated. The final price will be determined by the fee structure you use, but firms can essentially find the value of an advisor’s time by dividing the desired revenue by the available planning hours a financial professional has for clients. If a firm desired $250,000 revenue from clients with 1,000 available planning hours in a year, for example, the fee would have to be based on a value of $250/hour. This value can then be used as the basis of an hourly rate fee, flat fee, retainer, or project-based fee.
2. Net worth plus income: Some firms are choosing to price their planning services based on their clients’ wealth and ability to pay planning fees. This is similar to the AUM approach, but more accessible to those who may have a high income but little or no assets to manage and would like to pay for planning services. It’s typically set at a flat rate the firm thinks is affordable for clients. An example could be a fee that’s 0.5 percent of total net worth and 1 percent of gross income. Again, this price point could be incorporated into different fee structures.
3. The complexity of the plan: In this approach, firms can set a price point based on how complex and involved the client’s planning needs are. This is similar to setting a price based on an advisor’s time but may offer a simpler way for firms to gauge the value of the plan. They can set pre-determined complexity factors and use a pricing matrix to calculate a price point—assuming they know the number of hours that go into each specific aspect of planning and how much that time is worth. Once the full scope of a client’s planning needs is assessed, these complexity factors can be tallied up to come to a final price.
4. Value-based pricing: Financial professionals can also determine the value of their planning services by studying their competitors. At the highest level, firms can take a look at what differentiates their services compared to the next best alternative—the firm clients would go to if they couldn’t go to you—and determine a realistic dollar value for that differentiation and add it to their competitor’s price point. This may be a challenging way to find a price point but is highly effective for firms that serve a clearly defined client segment and offer best-in-class services. One word of caution here: This method only works if competitors’ pricing is reasonable and justifiable.
Whichever method you and your firm choose, finding the value of a financial plan is the heart of finding the right price point for your financial planning fees. Once you’ve done this, you’ll have to calculate and structure the final fee price and frequency.
Structuring your financial planning fee mostly boils down to what would be best for your clients. Much like there are several different ways to find the value of a plan, there are several different popular fee structures:
This is just a high-level overview of fee structures in financial planning to help you understand how to price your planning services. If you’d like to learn more about these, we took a deeper dive into the pros and cons of popular fee structures in another post.
Once you know the value of your financial planning services and the fee structure that works best for your clients, you can choose the frequency at which you’d like to charge your fees:
Finding the frequency at which you’d like to charge your fees is the last piece of the puzzle. There are many different considerations that go into pricing your financial planning services for the first time, but the structures outlined above comprise your primary options for setting a fee.
If you want to keep learning more on this subject, take a deeper dive into the practical considerations of fee-based planning in our recent eBook Shifting Your Compensation Model.
DISCLAIMER: The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.
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