A pricing model that fits clients — and advisors – Financial Planning

Finding the right fee can be a delicate issue. Even if newer pricing models offer more flexibility and transparency, moving away from a traditional plan is not an easy undertaking — and should not be taken lightly.

Disruptive forces, like robo-advisors and micro-investing, are making some of the old ways of doing business obsolete. And, if choosing the right fee can boost a business model, then the wrong fee —chosen based on gut instinct or rival pricings — can lead to value erosion, lost revenues and even a pricing war with competitors.

To remain competitive and grow their client base, however, wealth managers can adopt a more sophisticated and client-centric approach to pricing.

We know that traditional AUM pricing strategies — essentially a one-size-fits-all model — is inflexible for a number of reasons. Firstly, the structure does not accommodate emerging segments that may not yet have the required assets, but are willing to pay for financial advice. Another reason is that the model affords few choices to clients who are increasingly demanding personalization. Lastly, is the pricing model itself: A fee based on AUM does not communicate the value of financial planning services provided in addition to the investment management services.

There are a number of pricing metrics that can work well together, however, like a percentage of net income, monthly subscription fees and hourly pricing. But, which ones are right for what kind of firm?

A first step to any pricing strategy is to acquire a deep understanding of the target client segments’ needs, preferences and willingness-to-pay. Segment prioritization and clients’ needs analysis is arguably the most critical activity in any pricing strategy, yet most firms skip it or devote minimal effort.

The truth is clients are multi-dimensional with unique preferences. Advisors need to figure out if their clients are self-directed investors, for example, or whether they prefer to delegate the management of their investment portfolio. Do they prefer continuous interaction with their advisors, or are happy just meeting once a year? Note that this is not the traditional segmentation based on age, assets or a demographic indicator. Rather, these are needs-based segments that describe different usage profiles such as heavy traders and validators.

Client needs are the building blocks for versioning offers. Some versions will offer more features and benefits, while others will offer fewer features depending on the target segments’ needs.

At one innovative firm, for example, clients are given four options for financial planning services from a basic bronze bundle to a more sophisticated platinum package. In this pricing model, a client with less than $100,000 in investible assets — barely enough to get you into the parking lot of a typical wealth manager, let alone the front reception — can still become a client.

And better yet, clients only pay for what they need, and can select or deselect investment management or ongoing maintenance as required. This innovative pricing model also covers a large number of potential usage profiles, and hence maximizes the reach of the firm.


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To add insult to injury, these returns didn’t even come cheap. The average expense ratio was more than 1%.

A client’s willingness to pay is an important determinant for pricings. For example, most firms assume that wealth management clients are not willing to pay for financial planning services. Or, that younger investors are not willing to pay for financial advice. That may not be the case at all. Giving away valuable services that clients are willing-to-pay for results in lost revenues and value erosion.

Cost-to-serve is another important piece of the pricing puzzle. A basic financial plan takes up fewer hours of an advisor’s time than a comprehensive financial plan, and so should logically cost less.

To ensure we are effectively communicating the value of our services, it is important to incorporate the following three elements in our digital experiences: Clarity in explaining available choices and options, coherence to enable a client to easily decide the right choice given their unique circumstances, and calibration to demonstrate the link between price-paid and value-delivered. If we can do all this, client relationships should be a breeze.

Wealth management needs a new pricing model fit for growth and the future. To do nothing is not an acceptable option. Disruptive forces will continue to bring disruptive changes putting us at risk to fail or become acquisition targets. It is time for a more intelligent approach to pricing based on customer analysis, data driven insights, research and common sense.

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