Kitces & Carl Ep 152: Advisory Fee Confidence And Building The Happy-Client Stoke File

***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.

Show Notes

• Kitces Reseach on How Financial Advisors Actually Do Financial Planning
• Blair Enns: The Win Without Pitching Manifesto
• Blair Enns: Pricing Creativity

Kitces & Carl Transcript

Michael: Well, good afternoon, Carl.

Carl: Michael Kitces, how are you?

Michael: I'm doing well. I'm doing well. I'm suffering slightly because our air conditioner is on the fritz and at least as of when we're recording. It's fall, but still early fall. So it's warmer outside than inside, which means the house has slowly been heating all day long. So if I'm schvitzing as we go here, pardon my warmth, my unnatural warmth because modern conveniences are an amazing thing and I miss them the moments that they're not working.

Carl: It's funny. We have the heat on today. It's 41 degrees this morning when I woke up.

Michael: Wow.

Carl: Yeah. Which is great. We love it. Super good.

Michael: That sounds lovely for you folks in the mountains.

Carl: Yeah, for sure.

How Fee Confidence Impacts Firm Revenue [01:01]

Michael: So I wanted to talk today and get your perspective around a really interesting data point, data tidbit we found as we've been going through some of our productivity research data. So we do a series of 4 studies on the Kitces platform and around advisor research, 1 on marketing, 1 on the tech that advisors use, 1 on wellbeing, and 1 on advisor productivity, which kind of gets to process pricing, what we do, how we charge and all that.

And the team had put forth this very interesting kind of working hypothesis that, or I guess research question. We didn't quite have a full hypothesis yet, like a research question. So when you look at advisory firms that do investment management and financial planning, broadly speaking, I can kind of put them into two core camps. The bundlers who just charge 1 aggregate AUM fee that covers all the investment management and financial planning and the folks who charge separate. I've got an AUM fee for my investment management and then I've got a financial planning fee for the financial planning portion.

In theory, these should add up to be the same because I'm still doing the same body of work and I still need the same amount of revenue. So we kind of hypothesize like, okay, if advisor A is a bundler who charges 1% on a million dollar client and advisor B charges a $3,000 planning fee, then they'll probably have like a 70 basis point AUM fee on the same client so that they get $7,000 of AUM fees and $3,000 of planning fees, which adds up to 10, which is the same price as the bundler charging 1% on a million.

So we kind of came in with this research question. If we actually look at the bundlers versus the separate chargers, do the bundlers' fees still end up being similar to the separate charging fees or do we find some differences? Like maybe the advisors who charge separately for planning charge so much more for planning that they don't just make up the difference in their AUM fees, they actually end up higher because they're pricing the full value of their planning. Or maybe it would go the other direction. Two fees makes people more fee-sensitive than one fee. So we could also tell the story, well, maybe if you have a planning fee and an AUM fee, clients just get over-feed and you actually end up with lower total fees because they're just exhausted by your big old stack of fees compared to if you just did one super simple AUM fee. So we could make the case either way that it could add up to more or it could add up to less, which being the research nerds we are is like, cool, we got data. Let's just go swim in the data and see what we find. And what we found was a very big surprise to us.

Carl: I can't wait.

Michael: I didn't mean to make it as big of a build-up as that sort of ended up being. So there were 2 things that showed up in the data. The first was advisors charging separately had fees that added up to more than the bundlers. So the advisors who are charging separately seem to just have kind of firmer overall pricing than the bundlers, which sort of implies at least a segment of firms that are bundling planning into their AUM, may be undercharging in their aggregate fees because it turns out if you can be clear about the value of investment management, the value of financial planning is set a fee for both, it tends to add up to more.

But the very surprising thing that we found when we then drilled in further and said, how does this break down? The implication is the separate fee guys drop their AUM fee a little because they're charging a separate planning fee, but then they raise their planning fee by more to make it up. And so we were trying to figure out where that trade-off is. Is it like you charge half the AUM fee, but a really big planning fee? Do you just slightly cut the AUM fee, but you add a medium-sized planning fee? And what we found when we drilled into the data is that advisors who charge separate planning fees, flat out have higher AUM fees on top of their planning fees. So for a million-dollar client, a firm that does a lot of planning work in practice, when you calculate the blended fee schedule, typically ends up charging about 85 to 90 basis points. Some advisors are 1%, but some advisors are like, I got a breakpoint at a half a million or 750. So we mix all the data together, like firms that were doing planning work that bundle together usually average out with an average blended fee somewhere in the 85 to 90 basis point range.

Firms that charge a separate planning fee averaged a full 1% on the AUM on top of the planning fee. So they're not just charging a planning fee to make up for an AUM discount. They're charging a planning fee and they're charging higher AUM fees on average on top of it. So from the business end, this actually leads to some very good business economics. So we found some very strong profitability and economics numbers coming out of this. But the sort of underlying finding that we were seeing, and we ended up with a couple of other data points on this to support in this direction as well, is that some advisors just seem to have a lot more, what I'm now calling fee confidence than others. And advisors who have fee confidence are charging full-valued AUM fees and full-valued planning fees. And advisors who are struggling with fee confidence tend to roll it all into one because it's easier to talk about 1 fee than 2 and tend to discount down their bundled fee further because we're not feeling confident in saying I charge you 1% or I charge you 1.1%. Or like, "you know what, we're actually an above-average advisor, so just to be clear, I charge an above-average fee."

You pay a premium fee for everything else that you buy that's a premium offering and we charge a premium fee because we're an above-average advisor. Says basically no one. In theory, that's how it should work. But that's not what we do. We say I provide above-average value for a below-average fee, which is not really a sustainable business model in pretty much any industry.

So we're honing in on this direction that fee confidence seems to be a remarkable driver of how well firms are performing financially, how they're doing from a productivity perspective, how they're doing from a profitability perspective, just how they're doing from a sustainability perspective. Because when you actually charge full value for your fees, you can afford to hire and expand the team. You can afford to reinvest in the services for clients. You can afford to market and tell the whole world how awesome your services are for all the people that haven't heard of you before because you've got some free cash flow because you're actually charging the full price that it takes to do and deliver sustainably high-quality financial planning, investment management, and wealth management.

So I guess at a high level, we see the numbers emerging. And once we realize this is showing up as a fee confidence thing, we're seeing it all over the place. The caveat is I'm not actually sure why some of us are so much more fee confident than others. I mean, I can come up with a lot of guesses. But I'm curious, I guess both for your thoughts around, I don't know, just whether the idea of fee confidence resonates with you and how you think about why do some people have it? Why do others not? How do we help the ones that don't, to get there? There's a lot that come with fee confidence.

Why It's Difficult To Put A Price On Financial Advice [09:43]

Carl: Yeah. That's really, really interesting. I love the name of it. It's so interesting and I don't know what to make of this because it's been something I've been wondering about for 20 years. If you're an advisor and you charge an AUM fee and you've been charging an AUM fee for the last 20 years, you're already an above-average. Your fee is more than, at least in the minds of a consumer, I can go get the thing that you bill for. Again, there's all sorts of nuance around this, I know. But I can go get the thing that you bill for, AUM, cheaper elsewhere, dramatically cheaper now. It's always been cheaper, but dramatically cheaper now. Historically, we have, and I remember having clients say this to me, your business is so weird. You guys bill for the thing that feels like a commodity and you give away all the things that feel like they're the most valuable. You're planning and your advice and tax planning and talking to my kids and all of this clarity around values and goal clarification. You give that away. And we would say, no, no, it's all part of this. We just bill. But in their minds, because it's an AUM fee, they're connecting it to asset management.

So there's always been an element of fee confidence we've had to deal with. Because if you've been charging for something that some people think you can just go get for a lot less, there's always been an element. And then the other thing that comes into charging fees in our industry, which is so interesting is we all know the direct correlation between lifetime success. If all other things equal, if you're paying 1% a year, you have less terminal value at the end, all other things being equal. If the advisor doesn't add any value, all other things being equal. I just want to repeat that 7 times so nobody misquotes me. All other things being equal, you have less. So there's this in your head, you can read those stories as when I charge fees, this is in direct conflict to the goal that I want to help people reach. So it's always been a big question of mine. Like, wow, how do we do that? So I think the idea of fee confidence being clear about the difference you make and that the way you charge fees and the amount you charge, which is what we're talking about here, it tells a story. And to me, the most important part about it is you should be really, if there's part of that story that you want to remain hidden or part of that story that you're not confident in or comfortable having people know, well, then you need to think about how you charge fees and how you feel about fees. You need to work through that. Right?

Michael: I would highlight, this doesn't necessarily have to be or it's not meant to be a knock against the AUM model.

Carl: For sure.

Michael: If all the above-average advisors did was charge 1.3%, the numbers would all jive. But very few of us do that. In theory, there should be a lot of above-average advisors with above-average fees delivering above-average value. You can come up with any industry from cars to hotels. There's plenty of premium brands where you pay more and you get more, where you pay more and get extra quality or extra convenience or extra something that makes you pay way above average because it's worth it and I can afford it. I think we've observed this on a prior episode here that to me, there's a remarkable dearth of advisors that proudly charge a premium. I am an above-average advisor and you will pay an above-average fee and it's still worth every penny.

What's striking to me as we dig into this data is when we try to figure out where are the advisors that do have the confidence to be premium, they're not showing up by charging higher AUM fees. They're not showing up by just charging much higher AUM fees, they're showing up by charging slightly higher AUM fees and a planning fee. I don't know if that's because it's a more comfortable client conversation. But you can still say, we charge basically 1% "like everybody else" and look at all the planning work we do and it has a separate planning fee. I don't know if that's an easier story to tell from the advisor end than just explaining 1.3% or 1.5%. I don't know if maybe there is either some client pushback to higher AUM fees or more willingness to do a 2 fees, 2-services thing. I'm not even sure whether this comes from the clients or whether we're just sort of inflicting this upon ourselves as it were. But I guess frame it another way, when I go and try to find where are the proudly premium advisors who charge an above average fee for an above average service, in practice, they're charging a full valued AUM fee and a planning fee on top. Does that seem to be where they are?

Carl: Yeah. Yeah. That's it. What do you... Well, just one comment. They're one of my favorite people in the world is a guy named Blair Enns. And Blair wrote a book called "The Win Without Pitching Manifesto" and another book called "Pricing Creativity." I think Blair is really the world expert, and I don't say that lightly, world expert on pricing creative services. And maybe even larger, pricing advisory services. And he's over the last 5 or so years, he's been doing more and more in our industry. And one thing he told me a little while ago, he noticed that, he said the same thing. He's like, oh, this is so interesting that people are charging for a commodity and giving away the really valuable stuff. He's like, all I'm doing is saying, that's fine, continue to charge for the commodity, but why don't you start putting prices on these other things that you're doing, especially if it's going to be a new client or a new offering. They were thinking about doing tax. Oh, we'll just roll into the AUM fee. He's like, no, no, no, no. And he said, I have been shocked how elastic, how willing people are to pay for services that they really value.

Obviously, if done well and are real, and we're not smoke and mirrors here. So I think there's a lot more room in our businesses to be pricing our services for what they're worth. Now his challenge was, in a creative world, he goes to an ad agency and say, what would be the result of this? Or if a company was hiring an ad agency and they'd say, well, we'd see this much increase in revenue. And then it's suddenly like, okay, well, we can price our value somewhere in there. In our world or in interior design, he consulted with my wife because my wife's an interior designer. It's a little harder to put a direct number on the impact that you would have as an interior designer or as a financial advisor, right? But it's still there. And in fact, it's harder because it's often priceless. You know what I mean? What would you pay to not have to worry anymore?

Using External Feedback To Build (Internal) Confidence [17:55]

Michael: So here's what I'd like to ask you if you're comfortable going here with me. So I have to presume you've lived a version of this journey yourself because you charge a pretty darn healthy speaking fee. And I have to presume there's a point when you got started when like most folks that do speaking, it's like, wait, you'll actually put me on a plane and I don't have to pay my own airfare. Sure. I'll show up.

Carl: Have you been listening to me?

Michael: Give me 100 bucks so I can say I'm a "paid speaker." So you've lived a version of this journey, right? Where, to be fair, I think almost everybody has very little fee confidence at the beginning because we just really don't know that much and imposter syndrome is rampant and all that good stuff. There was something that changed for you because you went from the not-fee-confidence state that virtually everybody is in at the beginning to a fee-confidence state now, I guess to the extent you can think back or reflect on the journey. What changed? What were the conditions that brought about a change in your confidence in fees?

Carl: It's still to me, it still feels a lot the same, which is I... Well here, so first I remember when my book agent, when the first speaking stuff started happening after the book. Now, before the book, it was industry stuff and it was kind of that well, what do you pay? Oh, great. But then when the book came out, my agent was like, oh, you need to charge something that matters. We want 80% of the people to say no, but we also want it to be low enough. And I can't remember what the number was, but I think it was $12,000 or something. And I was like, what? Or maybe it was 5, whatever it was. I was like, did you say low and that number in the same sentence? Are you crazy? And I remember just being very self-conscious about it. And so what I did then, and I still have to occasionally do this now when I'm feeling a little under-resourced or maybe I'm tired or I've had a bad week or whatever and I go give a talk, is I've got to rely on external evidence. And by external evidence, I mean what do people say? What do the organizers say afterwards? What do the, what do they call those surveys or speaker ratings surveys...?

Michael: The feedback from the audience.

Carl: Yeah, yeah. When you fill out a thing, you got to rely on that a bit. And then it got to the point where I got so, now what I do in speaking is, honestly, it's so different from what almost anybody else does, especially in our industry that because it's so different, it feels very uncomfortable for me because I'm like, it'll just be easy to do the same thing. And then I would be like, okay, well, I,.. so I've kind of tried to think of it as I could give a B, a B-plus, a B talk all the time, or maybe a C-plus talk all the time and just kind of be safe. Or I could, every once in a while, and luckily I haven't had this happen as far as I'm aware, but I could risk it going really badly so that it would be A-plus every once in a while. Right? And so far I haven't had to go really badly, but the result of that is I'm still left with the same feeling because there's not a lot of benchmarks. There's not a lot of comps. There's not a lot of...

So I still go back to external evidence, which is a bummer. And one thing I would say is no amount of external evidence will ever fill the hole inside of you. If you're wondering about your value, it doesn't matter how many times people tell you you're great. So I just use it as one little piece. And then now I've gotten so comfortable that I know the result and I know the result isn't largely, it's not about me. It's about creating space for people. And so I know the space will do the work. And so now as a planner, I would be saying the same thing, gosh. So I used to keep a stoke file as a financial advisor. I keep it as I keep it now too.

Michael: Stoke?

Carl: Literally a stoke file. In the mountains or skateboarding, you're stoked, you're super excited, something that get you... I'd keep a file. It literally said "stoke" and it would be in my filing cabinet, when you had one of those. Now I have one on the computer. And anytime anybody sent anything good, like when a client would send a letter or a card, I'd put it in the stoke file. And if I was feeling bad about fee, like if I was having a problem with fee confidence, I would open up the stoke file and then I'd go, oh, that's right. What's that worth? What's that? Oh my gosh, that thing that they told me about the trip they took, they used the word life-changing. I only billed them $15,000 that year. I changed their lives. That's the kind of self-talk I would do using the stoke file to rebuild fee confidence.

Michael: So what I hear in this conversation is the role that external evidence plays.

Carl: It's a slippery slope, by the way. I just want to be careful with it, but I think if used strategically, it can be very helpful.

Michael: And I hear it in two veins. There's the benchmarking, the comparables, what do other people charge, what do other people do, right? What do other speakers charge? ....According to the book people, $12,000.

Carl: Whatever that number was.

Michael: So there's an external aspect of kind of benchmarking and what's the market in the first place, which is supposed to help us to explain the overwhelming majority of us that charge 1% because the overwhelming majority of us charge 1%. So we have natural validation to charge 1%. And if you're a little bit not confident in your fee, you charge slightly less than 1% because everybody else charges 1% and you're slightly cheaper.

The second part that strikes me, right, there's 2 groupings of external evidence, or at least external relative to us as the individual. There's what is the market charge, other speakers in your context, other advisors, and we have benchmarking studies out there around it. The other version of external evidence is what's the feedback of the people that you're serving and if they love it and are raving about it, maybe that means we don't charge enough. Or that they would very willingly pay more because they seem to value us quite a bit for the fees that we charge. Maybe that means we're not even charging our full value.

I try to be careful of the not... well, they love it. It's like, let's gouge the crap out of them. This is all from the positive vein of if you're that freaking valuable, it's okay to charge your full value because it just makes it easier to do this sustainably, to expand your team, to further deepen your services, to keep going down this path when you charge what it actually takes and what it's actually worth. So I kind of hear 2 pieces. There's comparables with the big caveat that at least is generically drawn. Comparables are averages. If you're above average or you're becoming above average, either you need to try to benchmark what the above average fee is or you need to look to the people that you charge to get affirmation that nobody's complaining about the fee or very, very few people are complaining about the fee because there's always some client that complains about the fee. You could charge them 3 basis points. They'd be like, well, I can get something else for 2.

Are clients good with the fee? And if anything, are they such positive raving fans that maybe I'm actually undercharging them because the evidence is literally the feedback they're giving me about how much they like me? And if I'm not sure, make a stoke file for regular reminders.

Overcoming Imposter Syndrome And Internalizing Your Own Value [26:26]

Carl: Yeah. And deep sort of empathy for the challenge. We got to keep... Because here's the other thing to keep in mind. Is everywhere you look, people are telling you you're not valuable. In the press... sorry, people other than your clients and your spouse. The press doesn't understand exactly what we do. Real financial advisors, people who are doing real work, you're changing people's lives. Having conversations that they never had before, helping them get clear about things, let alone the tax benefit and the investment behavioral coaching and all the tactical stuff that we do that's insanely valuable and worth it by itself. But just getting somebody help with goal clarification over time so they end up where they want. It's so valuable. So I think just finding a way to remind yourself of that when you're often being told the opposite because people are comparing it to some risk tolerance, out pops a portfolio, whatever we call it online now. So yeah, I think that's important. It's important. This is super fun.

Michael: I think it's powerful to recognize as well, per your comment, that nagging fear, that lingering bit of imposter syndrome, it doesn't go away.

Carl: Right, right. It doesn't. Even as soon as you brought it up, I was like, oh my gosh, I still feel it.

Michael: Which I think gets back to, so you need to collect the positive feedback from the people that you work with to give yourself the personal pep talk, get stoked.

Carl: Yeah. Yeah. And remember, imposter syndrome, the classic definition is having a really hard time internalizing your own value despite external evidence to the contrary. So I think you just have to kind of train yourself to, when you have that external evidence, keep it and just tell yourself because what the voice in your head is going to say, yeah, they're lying. They didn't mean that. And you've got to just train yourself to be like, well, okay, maybe. But that would also be kind of weird, kind of weird to send a handwritten note if you were lying. So at a certain point, and then obviously if it's a real problem, there's legit reasons for this to be a conversation with a trained professional around your own value. I think therapy around this is a legit reason. And especially a lot of us that came up into this industry, often we got into this industry because we had our own problems we wanted to solve. So you may already have some money stories that are challenging for you, and you layer on top of that, your fee, your value. Think of the words we're using, like your value. That can quickly... the fee you charge can quickly start to translate into your self-worth. Well, that's really, really, really dangerous terrain or sorry, really treacherous terrain.

Michael: Well, thank you, Carl. It's a good discussion. An interesting note to finish on for people maybe to ponder. Are there other parts of your history and relationship with money that's feeding into this conversation as well?

Carl: Yeah. Yeah. And how could it not? You know what I mean?

Michael: True.

Carl: Cheers.

Michael: Thank you, Carl.

Carl: Goodbye, Michael.