Executive Summary
As planners continue to seek ways to make their businesses more stable, successful, and profitable, it has become increasingly popular lately to talk about including separate fees for financial planning services, often in the form of a retainer. As the general view goes, doing so allows you to stabilize your income with a steady retainer base, and simultaneously helps you to better reinforce the value of your financial planning by setting a clear price tag on it.
There's just one problem: When you look at business models outside of our industry, we see the reality is that setting a separate price tag on standalone services does NOT help consumers value and appreciate the service more. In fact, it helps them to minimize use of the service, and absorb the cost only reluctantly (and sometimes even resentfully) when absolutely necessary.
So does that mean by charging separately for financial planning, we're proactively DISCOURAGING clients from utilizing our financial planning services and encouraging them to think more investment-only!?
The inspiration for today's blog post comes from a series of blog posts that Bob Clark has written recently on AdvisorOne. The first asks whether it is time to switch from asset-based to flat fees, followed by a second post suggesting a hybrid fees-plus-retainers model, and a third exploring the 'right way' to charge an AUM fee plus a retainer. In fact, the theme is similar to one I've written on in the past, noting how many planners seem to discuss switching from asset-based fees to retainers every time there's a major market event, effectively bailing out of the markets and converting their practice from a stock to a bond, even while telling their clients to stay put, when in reality there are alternative methods to deal with the impact of market volatility on a firm's profit margins.
But the focus of today's discussion is specifically on the concept frequently put forth that charging separately for planning is a good idea because it helps clients to VALUE the service. As the saying goes, "if all you charge is asset-based fees, clients will only think of you as an asset manager." (A view I have strongly questioned in the past.) The prescription, instead, is to charge separately for planning, thereby ensuring that clients "properly value" the planning by seeing (and writing a check for) the price tag associated with it.
The challenge is that when I look at other industries, I'm hard pressed to find any example where charging a fee outside of the core service makes customers value the separate service more. When airlines added a separate charge to check bags, the response was not an acknowledgement of the value that the airline provides in offering to fly our bags to our destination; it was an outcry against the airlines, and a decrease in the number of people who check bags. The health insurance industry has long since figured this out as well: if you want to decrease the utilization of a service, just put a higher cost on it (in the form of a deductible or co-pay). Writing a huge check to an out-of-network specialist doesn't make me value the specialist more; it just makes me have greater resentment that I have to write a separate check on top of all the services my insurance already covers.
And what if some of the service providers we already write checks to on a regular basis charged us more for some of the "premium" services they currently include? If the phone company said "You know, consumers just don't appreciate all the time and effort we put into erecting new cell towers and maintaining phone lines in their area and fixing them after a storm; we should add a separate $50 repair fee to every local household when we fix lines in their area" - does anyone think the consumer response after a damaging storm and a $50 invoice would be "Oh, NOW I understand the full value that the phone company provides!" Of course not. We already accept that there's a certain holistic offering that the phone company provides in exchange for our monthly fee; charging us separate for each new cell tower erected and phone line repaired does not ingratiate the company, nor their service, to us; in fact, it would be quite the opposite.
The same phenomenon holds true in financial planning. By charging a separate fee for planning - especially if we are already charging an AUM fee - the natural outcome is not to increase the perceived value of financial planning services... it's to decrease the utilization of those services in the first place! If we charge a separate planning fee, then each and every year the client will ask whether he/she really needs financial planning this year. If not, the client will ask if they can just skip the planning fee and go investment-only for the year (a phenomenon virtually all of my retainer-charging friends have witnessed). If we insist the fee is necessary, now the client just feels like they're being forced to pay for services they don't want or need, and the planner creates a win-lose situation with the client.
Which means in reality, the best way to get a client to willingly experience financial planning, and perceive the value, is to not charge separately for the service! By including it at no additional cost, the client is encouraged to take advantage of the financial planning services offered... thereby getting a more enriching and fulfilling client experience, increasing the firm's client retention rate, and likely enhancing the client's referral rate. By charging separately for financial planning, the opposite occurs: the client is less likely to utilize planning - not wanting to incur a fee for a service they don't fully appreciate yet anyway, especially at first - and thereby has a weaker connection to the firm, a less favorable client experience, and not much reason to refer friends and family. In other words, by charging clients separately for planning - and encouraging them to decrease their utilization of planning services - you can actually end out with clients who are even more investment-centric, because they don't actually use your planning services enough to value you for anything else!
Of course, I realize that some firms continue to be concerned about the revenue and profit implications of not charging separately for planning. To which I respond "Are you trying to run a short-term business or a long-term one?" A comprehensive client who pays a 1% management fee on a $1,000,000 portfolio will pay the firm $100,000 of fees (plus growth) over the next decade, and a client who receives ongoing financial planning is highly likely to stay for the whole 10 years because of the valuable experience and service they receive. In fact, the client who takes advantage of a quality financial planning experience is also more likely to refer friends and family, generating exponentially more profit. So the question arises: if a single $1M client over a decade is worth $100,000 in fees, plus growth, plus referrals... who really cares whether or not the client is maximally profitable in year 1 alone? If your clients turned over every few years, then it would be important to be highly profitable in every year (of course, if you're losing your clients after a handful of years, you have other problems beyond just what you charge for planning!). But if your clients really stick around for the long run - and if you're really delivering a service worth sticking around for - then why on earth would you want to set up expensive barriers in the first year (for the sake of your short-term profitability) and sacrifice the value of a long-term client relationship before it even has the chance to begin?
So what do you think? Is charging up front for financial planning really the best way to get clients to value the service? Or is it actually the best way to discourage the clients from even using the service in the first place? Is it possible that charging separately for planning could be a good short-term business decision and a bad long-term one? Are your clients profitable enough in the long run that you don't have to derive maximum profit from them in year 1, too?
