Executive Summary
Financial advisors charge a wide range of advisory fees, which can vary based on everything from the depth and breadth of the advisor's services, to his/her skills and expertise. Yet in recent years, there has been a growing level of criticism directed towards advisors who charge "above-average" fees, implying that doing so is a potential breach of their fiduciary duty to clients... with no regard to the fact that the advisor might simply have a more specialized level of expertise that merits those higher fees.
In fact, on a recent episode of the Financial Advisor Success podcast, we had Dana Anspach, who has a niche financial planning business with an incredibly well-defined process for serving retirees, that has grown from $30M to $130M of AUM in just the past 5 years. Yet rather than celebrating her success, many in the advisory community have taken to criticizing Anspach's fee structure of 1.25% AUM plus an upfront planning fee of $6,900, on the grounds that it is too high for a fiduciary to charge when 'everyone knows' the typical advisory fee is just 1%.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss whether advisors who charge more than the average advisory fee should be criticized for not charging less, or admired for their ability to craft a clearly defined value proposition that is so compelling that clients are willing to pay those fees for the value they perceive!
First and foremost, though, it's crucial to point out that the fiduciary rule does not require an advisor to be the 'lowest cost" provider or charge no more than the average advisory fee in the first place. Instead, it simply requires financial advisors to charge fees commensurate with their services, that are "not excessive" relative to the going rate for similar services. Which means there's nothing wrong with charging an above-average fee to deliver an above-average solution, as Anspach's firm does with their unique, differentiated, specialized service for retirees.
In fact, the only ones who seem to be complaining about Anspach's fee structure are not her clients (who appear to be finding good value in what her firm provides), but other financial advisors – who imply, or in one case outright said to me, “Why would someone work with Dana at 1.25%, when I offer retirement planning to my clients and only charge a ‘more reasonable’ 1%?”
The irony of the advisor making this statement is striking, given that as advisors we routinely urge our clients not to just shop based on price alone. We tell them to shop based on value. Not just the cost, but what you get for the cost. But shopping based on value means that reasonable fees could go in either direction – with advisors charging less, or more, based on the value they provide. Not to mention that from an advisor's perspective, competing on price alone eventually becomes a serious problem for most advisory firms. In part, it is because competing on price alone attracts price sensitive fee-conscious clients, but the real problem is that when you compete just on price, you're not competing on actual value and there's always going to be someone who can figure out how to charge less than you.
Yet in recent years, more and more advisors are competing on price, either by focusing on how their fees are lower than the fees of other advisors, and/or trying to offer differ advisory fee models - for instance, annual retainers in lieu of AUM fees - as a means of differentiating based on price. Which suggests to me that the real problem is that advisors are continuing to struggle in figuring out how to effectively differentiate, and lack confidence in their own value proposition (and therefore feel compelling to compete by cheapening their pricing, instead).
And this is actually borne out in some of the recent research on how advisors set their fees, with Bob Veres' recent study finding more experienced advisors charge higher all-in costs than those in their first 1-5 years, and our first XY Planning Network benchmarking study which found that 100% of financial advisors surveyed were raising their fees after their first three years of business – suggesting that as advisors gain confidence in what they do, they actually tend to raise their fees, even as they move upmarket and work with larger clients.
Ultimately, though, the fundamental point here is that when I see a growing number of advisors who snipe at the fees of other advisors, what it suggests to me is that there are a lot of advisors who still aren't really confident in their own value. Instead of asking how they can focus, specialize, and build a niche that commands higher fees the way that firms like Anspach have been able to do, they ask why her clients wouldn't just work with them instead since their fees are lower. But that entirely misses the point. Dana's specialized niche adds more value to her target clientele, and can command a higher fee.
Which means in the end, if advisors want to bolster their pricing and value proposition to better attract new clients and grow their advisory businesses, they should be looking to emulate successful advisors, rather than criticizing their business success!
(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.
Today I want to talk about a somewhat disturbing new trend I've noticed in the past few years. It started subtle and quiet, but I'm finding it's becoming more and more evident lately. Financial advisors being increasingly critical of the fees that other advisors charge.
As an example of this, on the Financial Advisor Success podcast we recently had Dana Anspach, who has a niche financial planning business serving retirees, with an incredibly well-defined process for working with retirees, and she charges a 1.25% AUM fee. And I heard a lot of critical comments about her podcast episode from other financial advisors, who made statements like:
"She charges 1.25%? How can you be a fiduciary and charge 1.25% when everyone knows that the typical advisory fee is just 1%?"
Fiduciary Duty For Reasonable Vs Excessive Compensation [Time - 1:06]
First and foremost, I think it's crucial to point out that the fiduciary duty does not actually require you to be the lowest cost provider. That is a myth. What the rule actually says is that you must charge fees commensurate to your services that are not excessive to the going market rate for similar services.
And the key point here is that, whether fees are excessive or not depends on the going market rate for similar services. Which means, there's no requirement to be cheaper than everybody else. You can be more expensive as long as you do more, provide more, or have higher quality, or more specialized expertise or services, to justify it. ERISA attorney, Fred Reish, has a great analogy for this. He says that under the fiduciary rule, you can sell Walmart services for Walmart prices. You can sell Tiffany's services for Tiffany's prices. Just don't sell Walmart services for Tiffany's prices, that would be excessive.
In the context of Dana's firm, when I look at her business, what I see is a unique, differentiated, specialized service for retirees. And as a result, she's grown from about $30 million to $130 million in AUM in just the past five years, charging 1.25% and an upfront financial planning fee of $6,900, for her initial retirement planning process.
Which means, simply put, the people who actually pay the fees aren't finding them to be excessive. Retirees are finding them to be good value for what Dana provides, thus her rapid growth. The only ones sniping at her about her fees, whether they're too high, are other advisors who imply or in one case outright said to me, "Why would someone work with Dana at 1.25% when I offer a retirement plan to my clients, and I charge a more reasonable 1% instead?"
Differentiating On Value Vs Price [Time - 2:52]
Now, the irony of the advisor making the statement to me is really striking. Think about it for a moment. If a client came to you and said, "Hey, I'm not sure I should work with you anymore. I found another advisor who charges 0.25% less and I think I'm going to make the switch." What would you say? You'd respond, "No, no, no. You can't just compare financial advisors on cost alone. You have to look at our experience, the services we provide. That other advisor won't do for you what I do for you. Of course, my fees are reasonable." In other words, we routinely urge clients not to shop based just on the price of the advisor alone. We tell them to shop based on value. Not just the cost, but what you get for the cost.
Now, that's great when the client says they're leaving you for another advisor who is cheaper, so you make the case based on value. Except it doesn't work out so well when the other advisor is actually the more expensive one and charges the higher fees. Right? When the other advisor is more expensive, now, all of a sudden, it's just about the fees and that my fee is reasonable and the other advisor's fee is excessive.
But the real problem here is that, by the time the conversation comes to fee comparisons, you've already lost the client. You've already lost. You know why? Because you've left the domain of competing on value, and you're competing on price instead. As I've written in the past about this blog in no great secret, competing on price eventually becomes a serious problem, certainly for most advisory firms. Maybe Amazon can do it because they're going to scale to a trillion dollars. Advisory firms are small, we cannot compete on price and scale.
And it gets even worse because when you compete on price, particularly in today's environment, you tend to attract price sensitive fee conscious clients. The kind who will pick you because you're 10 basis points cheaper than someone else, and the kind who will leave you as soon as some other competitor comes along, who's 10 basis points cheaper than you. But again, the real problem is that, when you focus on competing with price, you're not competing on your actual value anymore. You're not differentiating based on your skills, your services, your niche, or what you do for clients. You're just competing on price, which is just not a sustainable differentiator for most advisory firms. Because there's always someone who's going to figure out how to charge less than you, even if it's because they do less than you. Because if all you differentiate on is price, your clients won't care that other advisors charge less and do less because it's not about the value for them, it's just about the other advisor charges less, especially when you make it about price.
Financial Advisors Lack Confidence In Their Own Value Proposition [Time - 5:11]
So why are so many advisors starting to compete on price such that there's an increasing amount of sniping at other advisors' fee schedules that happen to be a little higher than their own? I think it basically comes down to this. Most of us who've been in the business for any period of time are not actually used to primarily selling ourselves and our value as the advisor, because we got trained in selling products. And we have, I think, kind of a giant collective confidence problem in our own value proposition. We're afraid to price ourselves for what we're really worth, so instead, we try to price below what our competition says they are worth, and compete on price instead of value. And this is actually starting to show up in the industry data as well.
Bob Veres did a recent study on advisor fees, which we wrote about earlier this week. Veres found that advisors who have less than 5 years experience charge the least, and advisors who have more than 20 years of experience charge the most. In fact, the median all-in cost of a financial advisor rises by 10% in just the first five years from getting started. The study found advisors start out around 1.35% of all in costs but increase to about 1.5% of all in cost with experience. In other words, as advisors get their first clients, and some experience, and some confidence, they then tend to raise their fees.
We've seen something very similar in XY Planning Network. We just launched our first annual benchmarking study in the network and I was reviewing preliminary results last week. And one of the most striking things to me in the study was that we found 100% of advisors were raising their advisory fees in their first three years in the business. 100% raise their fee schedule in the first three years.
Now, I know what some people are probably thinking. Of course, more experienced advisors command higher advisory fees because when you're more experienced, you have more skills, and you can say you're worth more. But I'm not sure that's true, or at least, that's not the right way to look at it. Because the other phenomenon that occurs is that, as advisors get more experience and more skills and their advisory firms get bigger, they also tend to move up market. They work with more affluent clients who just flat out write bigger checks because there are more dollars involved.
Which means, more experience is really actually more about helping you get larger wealthier clients who pay bigger fees, not necessarily that you charge a higher fee schedule to those clients. And if anything, you'd actually expect as advisors get more experience and move up market, their fees would decline because they're working with more affluent clients who tend to demand lower advisory fees because of the size their portfolio, but that's not what we actually see in the data. As the advisors get more experience, they work with more affluent clients and tend to raise their fees from what they were charging in the early years.
Finding Confidence In Your Value To Set Your Advisory Fees [Time - 7:46]
And so, when I see a growing volume of advisors who snipe at the fees of other advisors, what it suggests to me is that there are still a lot of advisors out there who aren't really confident in their own value. And, as a result, they don't look at a situation like Dana, as I would, and say, "Wow. How do I focus and specialize and niche my advisory firm, so I can command a 1.25% fee the way that Dana does, and grow $100 million in five years?" Instead, they ask, "Why wouldn't all of her clients just come work with me because I only charge 1% and she charges 1.25%? Why can't they see I'm less expensive and choose me instead?"
And frankly, I see the same thing occurring with the ongoing trend of advisors shifting to retainer fees as well, both annual retainers and income and net worth retainers, as an alternative to charging AUM fees. Now, as I've written extensively in the past, I'm hugely upbeat on the potential for retainer fees, including obviously, the monthly retainer fee we champion at XY Planning Network. Because it opens up new potential client markets that just can't be served by AUM fees because they don't have the assets to be managed. That's why we focus on Gen X and Gen Y clients with a monthly retainer fee at XYPN. So there are folks that have income and financial wherewithal to pay for advice, but they have to pay via a retainer fee because they don't have assets, and so, retainer fees expand the market for financial planning into huge blue oceans of opportunity.
But I think there's also a darker side of our industry's shift to retainer fees. Advisors who charge a retainer fee instead of an AUM fee for clients who do have assets to manage on the basis that clients should prefer their fee structure to the AUM fee structure. Which at its core, to me, is just a way of saying, "I'm not going to differentiate on my expertise, my specialization, my niche and my value. I'm going to differentiate on price and use a pricing model that's different than my competitor's." Even though, again, we still know that in the long run, just differentiating on price usually doesn't work out so well.
Again, I'm not trying to bash retainer fees. I'm a champion of them, and I've written a length about the opportunities that come from the growth in the retainer fee model. But if you're thinking about moving in this direction, be careful in thinking about why. Is it because you're trying to reach new clients who can't be served by the AUM model or is it because you're trying to use a pricing model as a differentiator, with all the risks that come from doing so, instead of actually just trying to differentiate your value by creating a focus in your business?
More generally though, the key point here is just that I think much of the advisor community is struggling with a collective crisis of confidence about the value of our advice, in a world where all these investment products that we were trained in are becoming increasingly commoditized. Competition is getting tougher, and differentiation is getting harder as the whole industry converges on that AUM model, especially under DoL fiduciary.
All that's true, but it doesn't mean the path forward is to differentiate on price and take shots at the pricing of other advisors. The path forward is to look at what successful advisors charge, especially if they do command an above average price, and try to learn what they're doing that works so well. How do they differentiate and show value to the point that clients are willing to pay that fee? And I think what you'll find is that the advisors who are succeeding in this area are the ones who specialize, go into niches, or find some way to differentiate themselves based on value beyond just trying to be the cheapest advisor or having a different pricing model than everyone else.
As we wrap up here, I hope you'll think about this in the context of your own advisory business as well. Are you really confident in the value you provide for the price that you charge? Are you growing the way that you want to be, given the prices that you charge? And if you're not really confident in your value and you're not getting the fees that you want, or you're not growing the way that you want, what do you have to do to find your confidence, refine your value, and truly differentiate yourself, so that you can get growing again?
This is Office Hours with Michael Kitces. We're normally 1 p.m. East Coast time on Tuesdays, although I'm traveling this week, as you can see from the background here. Thanks for hanging out with us this Wednesday morning. Appreciate you joining us and have a great day everyone!
So what do you think? Should advisors who charge more be criticized? Do advisors struggle to be confident in the value they provide for their clients? How can advisors build more confidence in the value of their own fees? Please share your thoughts in the comments below!
Kudos Michael for another thought provoking discussion. I think perhaps the real question concerning the “value” vs. “fee” issue is a bit muddled. I have very little doubt that Dana’s client’s feel they are receiving value for their fees. You can make this argument for any fee structure that has willing clients. The more important question seems to me is that is there really any “niche” practice that can justify 7K upfront and 1.25% AUM ongoing?
Most clients have nothing to compare the fees to. Their mental calculation is simply whether the fees are “worth it” to them. Their trust and confidence in the advisor are critical in determining the worth of services. After all, isn’t the advisors most important job to keep the client from doing anything stupid?
Michael, you’re always informative. Thanks for your efforts.
Great article, Michael. I look at my fixed-fee pricing model as a differentiator ALONG with my niche (divorced and widowed women) and services offered.
I like the ability to show people that they can have their money in a paid-off house or an investment account, and it doesn’t affect me. Annuitized or not? No impact to me. Etc. But I agree that if that was my only value proposition it would be a quick slope to Wal-Mart from Tiffany’s!
-Elliott Weir
III Financial
I think the fee charged really has to be based on the value the advisor provides. If Dana is providing a service that warrants $6900 and her clients see that value, then the price is justified. And charging 1.25% of AUM for ongoing planning/wealth management may be absolutely justified depending on the services being provided.
Every one of our clients pays a financial planning fee up front. Once we implement a plan we either charge a retainer or a percent of AUM depending on the client’s situation/assets/income. What the client pays is based on the services we will be providing them, which will vary with the complexity of their life. We do good work for our clients, and there is a price for that good work. I don’t think making blanket statements about an advisors pricing is valid unless you know what services that advisor is providing their clients.
Value is nebulous. What do you deem superior value? A prettier notebook to house the plan? A nicer office? Better retirement projections carried out to the 3rd decimal place rather than to the 2nd decimal? More importantly, as I raised below, is there a fee too high regardless of whatever value is provided? Is there a financial plan that you would pay 10K? Are there services provided that you would be willing to pay 3% AUM? This is the question that needs to be answered.
We are not sending astronauts to the moon here, we are simply helping people build wealth and trying to make it last until they move on to a better place. You can layer on all the bells and whistles with the latest technology, etc. but we are still talking basic math. As Rick Ferri says, “There is risk and there is return. Everything else is marketing.” No more accurate words have been written about this profession. It seems to me that the trend is that firm’s are adding layers of complexity to basic solutions so they can charge higher fees. Much of this is in response to though leaders such as Bob Veres and Dan Solin who are constantly railing on the fee structure by marginalizing any type of investment management and embracing the holy grail of “planning”. Rather than charging for investment management (or at least focusing on it) firm’s are simply playing a shell game and marketing services that require no more effort than portfolio management. I seriously doubt 99% of clients need to pay 1.25% for ongoing “retirement distribution” planning. Do their circumstances change so rapidly that they require such intense and precise “updating”? Should clients pay 1% AUM or thousands in retainer fees so their adviser can check beneficiaries, review an estate plan even though they are not estate lawyers, or other various tasks that are not complicated nor require “annual” inspection? This is going to be the next area of “excess” that will come under attack.
The same with service. What constitutes good service? If my competitor meets with her clients quarterly, should I do it monthly? Should I call each of my clients once a week? If once a week is good, why not every day? Isn’t that better service? Shall I feed Fred and Judy’s cat and dog while they are on vacation? What service is off limits? What if a financial “life coach” has a client commit suicide? Can the advisor life coach be held responsible?
There isn’t an advisor out there that thinks they over charge or that they don’t supply a “superior” experience.
I am a financial planner, which means we provide many more services than a money manager. If you are only providing investment management then you probably aren’t providing much ongoing service to a client. At my firm our client’s lives are evolving. They are juggling career, family, and myriad goals. We provide active cash flow management, career management, portfolio management, interface with their CPAs on tax strategy, and on and on. Financial planning is not just about how much money you have. Its about what quality of life you want and the plan to get you there. Its an ongoing relationship with a client. But that’s just how our firm works. What is terrific is that there are different advisors for clients with different needs. I don’t think there is a one size fits all answer to the fee question.
Price has to be anchored in the opportunity cost of the client not solving the problem. It has nothing to do with the “value” of the services you provide. If you want to charge premium prices, the first step is getting super specific about the people you serve. Once you’re in front of them, you have to identify an “emotional” pain. Advisors are great at identifying logical problems (not saving enough for retirement, under diversified, etc.) and then launching into how their “services” can address these problems — but the prospect doesn’t care. People do not make buying decisions unless they’re emotionally engaged.
As a mathematical proposition, how is possible for some advisors not to charge above average fees?
I think the proof is in the pudding. The clients are willing to pay more for more value. These are smart people and they are not being duped by someone who is overcharging. I always tell people that a good advisor should prove worth their price. If you listen to everything Dana says she is doing for her clients, you would understand her fee. Also, its not just the service, but the results for them which is proof in her retention rate. I agree that we as advisors need to own our value. If people want the lowest cost than their are options for them.