Executive Summary
Historically, financial advisors didn't actually have much control on the prices they charged clients, as financial plans were compensated by the products implemented pursuant to the plan... and the commission payout rates on those products were set by the product manufacturers (insurance companies or asset managers) with payouts controlled by broker-dealers and insurance agencies. It's only been in recent years, with the rise of the Registered Investment Adviser, where RIAs can actually control and set their own AUM and financial planning fees, that suddenly advisors must actually figure out if their AUM, hourly, retainer, or other pricing model is "competitive" to the marketplace and appropriate given the services they provide!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore how to determine if you have the "right" pricing for your services by tracking your prospect conversion rates, why your fees should be too expensive for at least some of your prospects, and why there is such thing as having "too high" of a close rate with prospects!
Though the marketplace has increasingly converged on the "common" price point of a 1% AUM fee, when it comes to fee-for-service financial planning (e.g., hourly, standalone projects, and retainer fees), it's hard to look at what other advisors are charging, because there aren't many advisors doing fee-for-service planning in the first place, and we're all so varied in the services that we do provide, that it's difficult to compare anyway. Some advisors will back into a price based on the income they desire and the time (billable hours) they can put into the business. Others will price based on the perceived value to the client. But another approach still is to look at what your clients (or really, prospects who become clients) are willing to pay, based on what they actually decide to pay (or not) in hiring you!
The key metric to track to understand whether your financial planning fees are priced appropriately is your prospect conversion rate – i.e., how many of your prospects become clients. Notably, this doesn't include leads who were not "qualified" (e.g., those who do not meet your asset or other fee minimums), because it's really about how many people who are qualified to work with you ultimately choose to do so. Thus, if you meet with 15 prospects, of which 10 are qualified, and 3 of them do business with you, your conversion rate is 30% (which is 3 out of 10 qualified prospects). And this number matters because it's a direct statement about whether your value proposition is being perceived as worthwhile by your prospects. Simply put – if your pricing is compelling, you tend to have a pretty high close rate!
In this context, you can think about prospect conversion rates in four tiers: Tier 1 (<25%), Tier 2 (25-50%), Tier 3 (50-75%), and Tier 4 (>75%). For those in Tier 1 (<25% conversion rate), there is a real problem; it may be that your pricing is too high for your value proposition (a pricing problem), or it could be that you're not doing a good job conveying your value proposition (a sales problem), but something needs to be changed. Tier 2 (25-50% conversion rate) is where most advisors are, and the fact that you've gotten to at least a 25% conversion rate is evidence your pricing is reasonable. The caveat, though, is that many advisors in this category don't feel very good about their conversion rate (since more than half of people you talk to are telling you "No"), but the reality is that your pricing can't be that far off if 25% of people are telling you "Yes", so the key here is to focus on improving sales skills to boost this conversion rate (but don't cut your pricing to grow faster, since your fees are reasonable!).
When it comes to Tier 3 (50-75% conversion rate) advisors, there are really two types. The first is an advisor with some kind of recognized niche or specialization. This type of advisor is arguably in the conversion rate "sweet spot", as it is virtually impossible to get everyone to do business with you, but the majority of prospects really are hiring you and demonstrating they see value relative to your fees. However, the second type of advisor in this category is an advisor who was a Tier 2 advisor, but rather than refining their marketing or sales process, simply cut their fees to increase their conversion rate. This type of Tier 3 advisor is in a problematic long-term situation, as pricing aggressively low just means you are eventually going to have trouble being able to afford to hire more staff and scale your business.
The final category of advisors, Tier 4 advisors (>75% conversion rate), can also be surprisingly problematic. Most advisors who close "virtually all" of their prospects are proud of it, but my advice for advisors in this category is to raise your fees! Because, in practice, the reality for these advisors is that if clients are this happy with your pricing, they'll probably still be pretty happy with a higher price... and an increase in fees should boost revenue from clients who are willing to pay more far more than it will reduce revenue from a few more clients who might say no. Which means these advisors can end up making more money (as higher fees more than offset the slight reduction in new clients) but doing less work (because there are fewer new clients!) if they adjust their pricing.
Ultimately, though, the key point is to recognize that your prospect conversion rate is an important metric for determining whether you are priced properly. And if you aren't keeping track of this metric, it only takes three numbers to keep track going forward: the number of leads you get, the number of qualified prospects amongst those leads, and the number of those prospects that turn into clients. From those numbers, you'll be able to tell if you are pricing your services appropriately, and, if you need to make some adjustments, what those adjustments might be!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces.
For this week's Office Hours, I want to talk about pricing, and specifically, how to determine if you have the right pricing for your services. Because I find pricing as a financial advisor is one of the hardest things that we have to figure out for ourselves. The irony is that, historically, we didn't actually have to figure this stuff out, because most of us got compensated primarily for either insurance products or investment products that we implemented (with commissions that were set by the insurance company or the asset manager). And so, it wasn't actually until the rise of RIAs that it even became necessary to figure out how to set your own advisory fee.
And even though the marketplace is increasingly converged on this common price point of the 1% AUM fee (although it's really a graduated fee schedule that starts higher than 1% on small accounts, tends to hit a 1% breakpoint at $1 million, and then is less than 1% for larger accounts), there's at least some standardization around fees for AUM schedules, but not so much when it comes to what I broadly call fee-for-service financial planning. Whether it's hourly planning, or standalone planning project fees, or annual retainer fees or monthly retainer fees... it's hard to look even at what other advisors charge because there aren't a ton of advisors doing fee-for-service planning yet, and we're all so buried in the services that we do provide, it's really difficult to compare anyways.
And so I see a lot of advisors struggling with just trying to figure out how they should price and basically whether to know whether they're too cheap or too expensive, or just how to even know if they're too cheap or too expensive.
Some advisors try to figure this out by kind of backing into it. Saying, "Well, what's an hour of my time worth to me?" or, "What does my hour need to be worth to make the income I want to make?" And then they work backward to figure out what their dollar per hour rate should be based on how many client hours they can bill in a year and how much money they want to make. Others do it by coming to the table and saying, "Well, what's the time worth to the client?" You know, if I'm going to work with executives who themselves bill $500 an hour, if I bill an executive $400 an hour I'm a deal for them, so maybe I'll price my time based on what it's worth to the client.
But today, I want to give you a little bit of a different framework to help figure out whether your fees are really right or not, and particularly once you've set fees, at least initially, and now want to figure out whether you've got the right pricing in place. But not by just looking at what other advisors charge, and instead, looking at what clients, or really, prospects who become clients, are actually willing to pay.
How Prospect Conversion Rates Reveal Whether Fees Are Too High Or Too Low [Time - 3:00]
And the key metric to understand whether you're planning fees are really priced appropriately or not is your prospect conversion rate. Your prospect conversion rate is the number of qualified prospects you talk to who actually decide to become clients. And a key point here is the number of qualified prospects. "Qualified" means people you meet with or talk to who are interested in doing business with you and actually could do business with you.
For instance, if you have a $250,000 portfolio minimum and you meet with someone who has $100,000 portfolio, you're not going to work with them. And it's not because they don't value you or what you do or that your pricing was right or wrong, they're simply not a good fit because they don't meet your minimums. They weren't qualified as a prospect to work with you. Similarly, if you charge $3,000 as a planning fee for a comprehensive retirement plan and work mostly with retirees and you meet with a prospect who's a 32-year-old doctor trying to repay graduate student debt and decides not to work with you, it's probably not because she rejected your pricing, but just that she's not the right fit in the first place since you work with retirees and she's looking for student loan refinancing strategies.
So the question is how many qualified prospects do you talk to who could reasonably do business with you, and then how many of them actually decide to do business with you? This is actually a pretty simple ratio once you track it. It's a percentage, right? If you meet 10 qualified prospects and 3 of them do business with you, your conversion rate is 30%. If 8 out of 10 do business with you, it's 80%.
But here's why the numbers matter. Because your conversion rate with prospects is a direct statement about whether your value proposition is being perceived as being worthwhile by your prospects in the first place. Simply put, if your pricing is compelling, you tend to have a pretty high close rate. And if your pricing is unrealistically high, you tend to have a terrible close rate because you can't convince anybody to do business with you because the value is not reasonable for the price.
And the way I like to think about this is that you can basically break these up into four categories: those of you who close fewer than 25% of your prospects, those who are doing 25% to 50% of your prospects, those who convert 50% to 75% of your prospects, and those few of you who convert more than 75% of your prospects into clients. Now, these percentage thresholds aren't meant to be like super precise and exact, but, conceptually, I'm just going to call these Tier 1 (<25%), Tier 2 (25-50%), Tier 3 (50-75%), Tier 4 (>75%).
Tier 1 Prospect Conversion Rates – Under 25% [Time - 5:29]
If you're in Tier 1, your prospect conversion rate is under 25%, and you have a problem. Unfortunately, this is actually the area where it's often hardest to diagnose. Either your problem is that your pricing is just too high and unrealistic for the value proposition you offer, so you really have a pricing problem, or you need to work on your sales skills. And your pricing may actually be reasonable for the value you provide, but you're not doing a very good job of conveying that value proposition in the first place.
I mean, almost by definition, if your close rates are this low, clearly, in the end, your prospects are not finding your value proposition compelling relative to the fee. But whether that's because you're charging too much, delivering too much value or just not conveying the value well enough is sometimes hard to figure out, at least from just the conversion rate alone.
As a starting point, if you find yourself in this category, I'd try to do actually some comparisons of maybe your pricing and what you're doing to other advisors in the area just to make sure you're not totally off base. If you find you're not totally off base, you probably need to look at some kind of sales training to learn how to better communicate your value proposition and how to turn prospects into clients. Because frankly, most advisors I know who are in this category and are struggling with close rates this low tend to be new, and tend to be less experienced. And while every now and then it's a pricing problem, usually it's a sales training problem here.
And I point this out because it means if you're getting started and you can't even get to the point that 25% of your clients or I should say prospects turn into clients and your pricing is not just totally out of whack, don't try to solve this problem by cutting your fees. Solve this problem by going to find some sales training. Because the reality is even if you're a fiduciary, no products, fee-for-service, fee-only financial planner, you still have to learn to sell. Not selling products, you're selling your services, but that still means you're selling yourself and your value. And it doesn't matter how much value you provide if you can't convince anybody to pay you for it.
Not to mention that even if you convince clients to do financial planning with you, you're probably going to struggle to convince them to implement the financial planning advice you're giving them if you're not very good at persuading them. So invest a little in sales and persuasion training for yourself. That's how you solve a Tier 1 problem in most cases. It's usually not a pricing issue.
Tier 2 Prospect Conversion Rates – 25% to 50% [Time - 7:46]
Now, the next tier of prospect conversion rates, Tier 2 (converting about 25% to 50% of the qualified prospects you meet), is where I find most financial advisors are today. For every four prospects you meet, you convert one or two of them, often in a competitive situation with others. So you're evaluated as 1 out of 3 firms, you win about 1 out of every 3 clients, you've got a 33% close rate, you're right in the middle of Tier 2.
For most firms in Tier 2, the mere fact that you've gotten to a 25%-plus close rate means your pricing is at least reasonable. Because unless you're just an amazing salesperson, it's pretty hard to close even one out of four prospects unless you have some pretty reasonable value proposition relative to the fees that you charge. And so first and foremost, if you're here in Tier 2, you should feel pretty good about the value proposition you're providing and the fees that you're charging. It may not feel good because a Tier 2 conversion rate still means more than half the people you talk to tell you no. And it's not pleasant being rejected more than half the time. But again, by closing at least 25% of the prospects you talk to, your pricing can't be all that far off. People are saying yes.
In fact, the biggest issue if you have Tier 2 conversion rates is usually not that just that you're converting 25% to 50% of your prospects, because you can grow a business at that pace, but most folks at Tier 2 are trying to figure out what they need to do to move up to Tier 3 and improve their close rates. Because a lot of advisors want those rates to be higher, right? It's hard enough to find prospects, especially qualified prospects, it sucks being shot down by the majority of them. So if you could close two-thirds of your prospects instead of being rejected by two-thirds of your prospects, you would grow a whole lot faster.
The temptation, though, is to try to cut your fees a little bit more to bring up the close rates. And while that might be necessary if you're Tier 1, if your pricing is that out of whack, if you're already in Tier 2, the solution is virtually never to cut your pricing to grow more. It's not the right way to increase your close rate if you're already over 25%. If you want to increase your close rate from here, either look to your sales process, maybe you could still use some training to learn how to create better rapport with prospects or learn to better communicate your value, or look to your marketing process and figure out if you could better target your marketing to get prospects that are more likely to be a good fit in the first place.
For instance, I see a lot of firms with Tier 2 conversion rates who have, say a $250,000 minimum, they're getting in front of prospects with more than $250,000, but they manage all their clients' portfolios on discretionary basis and they keep getting prospects who say, "Well, I don't really want to turn over my portfolio, I just want to pay you for a little advice along the way." So yes, technically the prospect was financially qualified to work with you, they had the asset minimum, but if your marketing better communicated, "We work with people who delegate their portfolio management to a professional so they can spend more time enjoying their lives," they'd screen themselves out before ever coming to meet with you, even though they have the financial wherewithal, because they're not actually inclined to delegate, and so they're dragging down your close rates, but not because you're priced wrong, because you're talking to the wrong people.
In other words, if you're meeting with qualified prospects only because they're financially qualified but they're really, like, semi-qualified, because while they could pay for your services, they're probably not really the type of person who would, they're dragging down your close rates because you're meeting with the wrong people and not because you're priced wrong. And what that means is the solution isn't to try to get your prices down to get bad fit prospects in the door anyways, it means it's time to refine your marketing to ensure you meet with the people who are most likely interested in working with you, at the fees that you charge.
Tier 3 Prospect Conversion Rates – 50% to 75% [Time - 11:26]
Now, advisors who move up to the next tier, Tier 3 (50% to 75% conversion rates of the qualified prospects you meet with), these are the advisors that generally are in what I call the sweet spot. The majority of the people you meet with decide to do business with you. And realistically, it's virtually impossible to get everyone to do business with you, so when you're getting 50% to 75% of your prospects to do business with you, you're in the sweet spot, at least as long as you didn't cut your fees in order to get here in the first place. Because ultimately I find there are two types of advisors that tend to operate at Tier 3 conversion rates.
The first is an advisor who has some kind of recognized niche or specialization. It doesn't have to be a super narrow niche like, "I only work with this particular type of doctor," it could simply be something like, "We work with retirees who like to delegate their portfolios so they can go live their lives and we're really good at retirement planning for them," and all your marketing is focused on the retirement planning you do for that particular type of delegator baby boomer that you work with.
And so the reason you have a solid Tier 3 conversion rate is you know exactly who you serve, what you do for them, why it's valuable. You know how to describe that, you market to those people who would be super qualified to do business with you, and you've gotten good at explaining the value proposition. So you grow just firing on all cylinders, good pricing, good sales, good marketing, and a good close rate.
The second type of advisor at Tier 3, though, is the one who was in Tier 2, but rather than getting better at their marketing and sales, they just cut their fees or never really charged enough in the first place. And so they got here despite not really having a very refined value proposition or marketing or sales process.
So if I ask you a question like, "Describe to me who your ideal target client is," and you can answer that question clearly, you're probably in a good sweet spot version of Tier 3. If your answer is basically just, "You know, people with money or assets who can afford my services and want to pay for my advice," or something that's very broad and generalized, you are probably priced too low and you're making up for weakened sales and marketing with pricing that could actually be higher if you focus on your sales and marketing. And the fact that you have such a good close rate at Tier 3 likely means you're experiencing some good business growth, but you may not feel like you have much to fix right now, and it's going to create problems in the future.
Because if you're really not that focused and you're not growing because you have a clear value proposition for a clear target clientele simply because you're priced so low that the majority of people say yes anyway, at some point, you're going to have trouble being able to afford the staff you need to grow and scale your business because you're not actually charging enough. And you solved what really was a marketing or sales problem by underpricing instead of actually solving your real marketing and sales problem.
And, you know, Jay [from Periscope], you had a question:
"Is this based on AUM fees or planning fees?"
Really either. I see the biggest challenges for advisors when they're doing this with kind of straight planning fees because the standard 1% AUM fee means it's pretty easy to know whether your pricing is out of whack or not. If you charge 1%, yeah, you can't be too far off. It's folks that are doing hourly and retainer fees I find that are most challenged to figure this out. But it applies for AUM fees as well.
Tier 4 Prospect Conversion Rates – 75%+ [Time - 14:33]
The last tier of prospect conversion rates, Tier 4, are those who are over 75% of their qualified prospects. And if you really find yourself in this category, there's only one thing that I can say to you, raise your fees. You are priced too low if you are closing more than 75% of the qualified prospects that you sit in front of.
I know this is a little bit of a controversial thing to say. And some firms with really high close rates blow me off with statements like this and say, "My clients like me and they're happy to pay me what I charge them and I'm growing so what's the problem." But the reality from a business perspective is that even if you provide a great value proposition, you price it well and you market it clearly and you sell the value effectively, there should still be some tension where a prospective buyer has to think, "Do I really want to pay for this?"
Because, in practice, what happens if 80%-plus of your prospects will pay your current fees, then it's virtually certain that 70% of your prospects would probably pay your fees, plus another 20%. And if you do the math here, if your conversion rate drops by 10% and you raise your fees by 20%, you are making more money and you'll actually have to do less work. Because the 20% more in fees more than makes up for the 10% fewer prospects, and you just have to do work for 10% fewer people.
Because again, if your value proposition is that good and your marketing is that good and you're that effective at selling and 80% or 90% of the people you meet with agree and still want to do business with you, there's a lot more room left for you to charge more, create a little bit of tension where at least they've got to think about it for a moment, and then find that most of them are going to end out saying yes anyways if your value proposition is that compelling. Yes, if you charge a little more they may think about it a little bit longer before coming on board.
But again, if you're closing 75% or more of the prospects you see, your value is compelling enough that most of them would pay more and not think twice about it. And because you're creating so little sales tension right now, you're driving virtually all of them to say yes instead of at least challenging them to pay you a little bit more, to find out most of them would say yes anyway. You're making it too easy that they don't have to think. Which may feel great personally, so makes the sales process easy, but you end up doing more work for less money, and then you have fewer resources to hire more staff to grow your business and scale up because your conversion rate is too high because you're pricing too low.
Or just stated more simply, yes, there really is such thing as having too high of a close rate. If you are closing upwards of 75% of your prospects, you could be charging more. And not that even if you had a slightly lower close rate, you'd still end out making more money while doing less work and you may be surprised to find out how many people still say yes even when you charge more.
Tracking Your Sales Pipeline And Prospect Conversion Rates [Time - 17:13]
The caveat to all of this discussion is that for at least a few of you listening, if I asked you what your current conversion close rates are right now, the answer is probably that you don't even know because you don't track it. So if you're not tracking it, you need to start. And I'm going to give you three numbers, just three numbers that every advisory firm should be tracking going forward. Number one is the number of leads you get. Leads are the number of people who contact you and in some way, shape, or form at least express interest in learning more about your services and what they do.
Number two is the number of prospects you get. Now in this context, prospects means qualified prospects. That's the number of leads from the first category who actually turn out to be qualified and able to do business with you. That's literally a defining characteristic between a lead and a prospect. A lead is interested in doing business, a prospect is someone who's actually qualified to do business with you.
And then number three is the number of actual new clients you get and you brought onboard. Because with these three numbers now, you can figure out the relevant ratios, the conversion rates. If you divide the number of prospects and the number of leads, you get a sense as to how well targeted your marketing is. If you have good marketing, most of the leads turn out to be qualified and your lead to prospect ratio is high. If your marketing is too generalized, you get lots of leads but relatively few who are qualified to do business with you and you waste a lot of time with non-qualified leads, and the ratio comes out very low.
In turn, now you can divide the number of clients into the number of prospects and figure out what this key prospect conversion ratio is. If you had 18 prospects last year and you closed 6, you had a 33% close rate, you're a typical advisor. If you closed 10 prospects with well-targeted marketing, you're in the sweet spot. If you closed 14 or more out of the 18, you need to raise your fees.
But I hope this is helpful as just some food for thought and maybe a different way to think through why it's so important to track that sales pipeline, leads, prospects, and clients, and why these conversion ratios matter so much. And how you can figure out in the coming year if you're priced appropriately based on what percentage of prospects actually become clients, at least once you take the time and track it in the first place.
This is Office Hours with Michael Kitces, normally 1 p.m. East Coast time on Tuesdays. But thanks for joining us here on Wednesday today, and have a great day.
So what do you think? Should your financial planning fees be too expensive for some prospects? Are you keeping track of your sales pipeline? What metrics do you find most helpful for evaluating your pricing? Please share your thoughts in the comments below!
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