Executive Summary
For most of the financial advice industry’s history, figuring out compensation has been relatively straightforward, as the commission rate that a broker received was set by the manufacturer of the products that were sold. And even as the industry moved more towards the investment management (AUM) model, compensation rates became a little less rigid, the standard fee of 1% of assets under management acted as a firm pricing anchor. However, with the shift in recent years to holistic, advice-centric approach – where advisors sell the value of their personal time and advice and can ask for any price they want – clear pricing standards have gone out the window.
In our second episode of “Kitces & Carl”, Michael Kitces and financial advisor communication guru Carl Richards sit down to discuss the question of establishing a price for your financial planning services, why many advisors feel such anxiety over setting (and sticking to) their pricing model, the ways in which advisors can communicate their value to prospects and clients to justify their price, and why, many times, problems around pricing are really the result of our own inward confidence problems.
Because the reality is that advisors offering holistic planning are essentially rudderless when it comes to knowing how much to charge for their services. For the first time we, as advisors, have to convince our clients (and ourselves) that the intangible service that we provide is worth at least the price at which it makes sense to operate as a viable business. As while value in the past was defined by the products brokers had access to, now that “value piece” is far more esoteric and relies not only on our own knowledge and expertise, but (sometimes more importantly) in our ability to communicate effectively enough that it results in positive client outcomes!
And since consumers have access to far more information than they did in the past, the odds are that, at some point, a prospective client is going to push back on your price and wonder why they should pay you more than some other advisor with a seemingly similar “comprehensive financial planning” offering who charges less… or the inexpensive, automated service from the online robo-“advisor” with a substantial advertising budget. Fortunately, though, by focusing on a niche with unique challenges and by going deeper on issues that that virtually no one else is talking to them about, advisors can have an easier time communicating the value they bring to the table.
More generally, advisors who get questions about their fees might look at their own “lead nurturing” process. Because, if a prospect has opted to sit down with you in the first place, and after uncovering their desired future state, what’s holding them back, and how you can close that gap for them, they still don’t understand why you charge what you do… then the problem might not be with your pricing, but with how you present yourself to the public in the first place.
Ultimately, the key to the pricing conversation is that you, as an advisor, have a story that you believe in around the value that you provide, and can articulate that to clients and prospects. Because once we believe in ourselves and the value that we bring, then we can set a price… and be confident that we are worth what we say. In other words, if at the end of the day you’re concerned about your pricing, be mindful of whether it’s really a problem of whether your price is appropriate for the value you provide… or if you just need to get more confident in your own value proposition in the first place.
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***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 & Carl Video Transcript
Carl: Greetings. Greetings, Michael.
Michael: Greetings, Carl.
Carl: Nice to see you again. So we are back for, I guess what we're going to call episode one because the last one was episode zero because we weren't sure if there was ever going to be another one of what we're calling still (subject to change) Kitces & Carl, which is just really a conversation between Michael and I about topics that we care about, in hopes that some of you may want to listen to it.
Carl: I thought, look we want to cover a bunch of diverse topics. The more diverse the better. But we sort of left this thing of value kind of hanging out there last time. And so, I thought we should get more specific today. It'd be fun to talk about, really specific about how do you put a price on the value you provide for a client. And maybe even more specifically, why is there so much anxiety around putting a price on our value?
Where Anxiety Around Pricing Financial Planning Services Stems From [1:10]
Michael: I think the anxiety comes from the fact that for the first time ever more and more of us actually have to put a price on our value. If you go back to our roots, most of us were compensated by commissions and not that I'm trying to bash commissions, but you don't set the commission. It is what it is. You either get the product sale or not and whatever the volume is, take your commission. We never had to set our own pricing, in a commission based world, it was dictated by the company. And even when we got to the AUM world, the industry seems to have converged so quickly on 1% is the benchmark fee, a little higher if you're smaller than million, a little lower if you're bigger than a million, so we have graduated slope.
But there's not a lot of variability in AUM fees because we kind of converge in a similar place. But the moment you try to either do something different and you have to deviate from the standard fee schedule, or just, you're just going to say, here's my financial planning fee. Here's my retainer fee. Here's my hourly fee. You are basically plucking a number out of thin air and saying, this is what I'm worth and it's scary, it's freaky, it's hard. I'm going to pluck a number out of thin air and then someone's going to say, "Where did that number come from?" Well, I don't know. I think it's what my time is worth, I guess. And then you kind of go downhill.
Carl: Yeah, it's really...it reminds me a bit of when I got asked to do the first art show. It was a 50-piece solo exhibit that was going to last eight weeks. And everybody watching this will be like the same response I had which was, "What are you talking about?"
Michael: You draw things with a sharpie and they want to...
Carl: Yeah, yeah. And this great gallery wanted to do an eight week show, 50 pieces, solo. I was like...and I knew enough from my background to say yes and figure it out later. But the first thing I had to do was like, how do we price this? And so I went looking for the secret, how to price art book, right? And it won't come as a surprise, there wasn't one. I ended up... it's a long story, but I ended up pricing it per square foot because everything else seems to be priced in per square foot. So we priced the art per square foot.
Michael: The physical art? A big piece is this much and a small one is this much, and how can we get the square footage of your sharpie drawings?
Carl: Yeah. That's exactly right. We made these big chalkboards and we priced them per square foot. But anyway, I think it's an issue, right, when you have...it's the tyranny of options. And so, I think that's where the anxiety comes from. And I also think the anxiety comes from for maybe the first time, we're in a position where you better be ready to defend that pride because the story, the joke is up. Everybody knows. And I'm speaking, you often have to remember, I know you primarily have gotten your language around the choir that we're speaking to, right? And I often am using my language around the traditional industry, right? And so, we often have to sort of give each other context for this. But I'm thinking of the whole industry, the gig is up.
You know, if you think you can sit around and charge commissions and no one's going to know or you can charge a markup on that fixed income portfolio you're buying at XYZ brokerage firm and no one's going to know, people are starting to figure that out. And so, we've got to have a story. I think the important thing, we could get into pricing models which would be an interesting discussion. But I also... Well, another piece of the anxiety for me is just flat out and again, me speaking to the whole industry not the choir, probably the people watching this. So it's probably not you watching this. It's probably the rest of the industry. You actually don't have any value, right? There's a whole chunk of the industry that they never work well. There might have been value in the past. We talked about that last time. Right?
Michael: I think there was value and I get you access to markets, I get you access to investing, my company's products are better than the other company's products. Our value was defined by the products our companies gave us that were available. Now our value is increasingly literally us, what's in my head, what's between my two ears, what can I communicate out to you and how can I deliver that in a way that creates some positive outcome for you. And just, I can make up any price I want for an intangible service that no one knows how to value until after the fact. But I'm supposed to put a number up front and get someone to say yes.
How To Communicate Value To Prospects And Clients [06:01]
Carl: Right. Right. So, okay, let's get really specific. One of the questions was prospective client comes in, you've done a first meeting with them. They come in for the second meeting, which is like, let's just call it an onboarding meeting. I don't care if it's a second, third, fourth, fifth, whatever, don't get caught up on that. You come in for the meeting where it's time to sign up to become a client, you go, you present them, you walk them through, which we could talk all about any one of these steps, but you walk them through how they're going to pay you and they say, "Oh, my gosh, why is that this and I met with somebody else that was this." How do you respond to that?
Michael: So I come at this from two ends, how we respond in practice, and then how I would like to respond to it ideally, which I'll admit even I don't think our firm is entirely at yet. So, how do we respond in practice? Essentially we start value adding our way up. That firm really just does investment stuff. We do more comprehensive planning. In fact, we really specialize in retirees. That's our firm's focus. So, we are going to go much more in depth with you about social security planning and timing, which can be a multi-hundred thousand dollar decision compounded over your lifetime. We can help you make decisions about Medicare, about how to actually generate dollars out of your portfolio on the tax-efficient basis, to save you dollars in tax. We start layering up our value piece to be like, yeah, they charge that but they don't do as much as we do. We do more in these areas. And since our firm is very much traditional focused on retirees, we do the whole baby boomer retirement transition, they got money, it works well, it's a good business model.
We end up focusing on here's how we go deeper, not just we're better and we have smarter CFPs with more years of experience. We've figured out that doesn't really work because everybody says that. But we have that we can get a little bit more specific into talking about, here's how we start adding value with social security decisions, Medicare timing decisions, tax-efficient liquidations. They're still kind of technical things, but I can put numbers to them and they're a level of depth I know virtually no other advisor is talking to them about. And so, I don't have to explain my whole fee, I've just got to explain the "delta why I'm a little bit more expensive than the other firm. And we can usually close that gap with, here's all the things we do beyond just the investment management part that that other firm does.
Carl: Okay. So my turn and this is really interesting to me because really, the reason I wanted to do this is that there is no right or wrong. But I am often wrong but never in doubt. Right? So, by definition, you think the way you do it is right, therefore everybody else is wrong. I'm cool with that.
Michael: I got some clients, clearly my way works. But what about you?
Carl: And I'm cool with that. And so what Michael just presented is the right way and it works, right? And let me give you another right way and it works, and it's completely different. And my argument is that if that question comes up, we've got an upstream problem. So I'm going to answer two things. One is, and I just would beg people to believe me on this because it doesn't match with the way we were trained and taught. If that question even comes up, I did something wrong upstream. And so if clients are coming...if prospective clients are walking in the door via channels where they had a chance to kind of stalk you a bit, right? Window shop, read what you're doing. I'm begging people to be on your...
Michael: Check out the website, stalk my social media, right? You can recon an advisor quite a bit these days if you want to.
Carl: Yeah. So if you've done that, and what you're talking about there is, and again, this is where there's a little divergence, and neither one of them right or wrong. But if what you're talking about, there are matches up, right? So they've self selected for the kind of conversation I'm going to have with them. And then I had a first meeting where that first meeting and by the way, we make an assumption in the United States, and I think most of the countries that we can't force anyone to come to a first meeting. So they came there at their own free will. They raised their hand and said, I'm going to come talk to you. And we had a first meeting where we uncovered something sort of as simple as what brought you in today. And one of my favorite questions after what brought you in today is, and how do you think I can help with that, right? So we've uncovered in some way which I'm positive we'll do a future episode on those questions. We've uncovered in some way the clients' desired future state and we've gotten some feedback from them on how we could help close that desired future state.
Then they're walking to the car... So my goal would be not to be the most valuable one, but to be the only one. And so if I can get them to walk to the car thinking, "Oh my gosh, I just had the most amazing experience that I didn't go in expecting. For the first time I felt listened to. For the first time I felt heard. For the first..., I learned things about me that I didn't know when I walked in." You can't put a value on that. And so, at the next meeting when we say, great, here's what I think I heard you say. Carl, you want to spend more time with your family mainly outside. You want to serve in the community. And the five most important goals you have are these and here they are sort of ranked in order. We wouldn't say this out loud to the client, but you've ranked them in order of consequence of failure, sort of riskiness, that resonates you. Your first goal is getting life insurance in place so you can sleep at night. And you're like, "Oh yeah, that's..." And the fee is this.
It's not even... there's nothing to compare it to. So that would be the first goal. Now let's say you fail at that goal. And the question comes up because boy, it's hard. I'm not pretending like that's easy. But I'm telling you, it's possible. But so then the question comes up, why are you this much and that person is this much. My philosophy would be to, number one, absorb with empathy. Right? I understand that's it, you're making a really important decision here and yeah, that's a really important question.
Michael: It's a good suggestion because I would have just been coming right back at them with the math.
Carl: Yeah. Yeah. And I think we do that a lot and I think it works. What you're doing is, here's the facts and figures. And there's nothing... It works. Obviously it works, right? So it's just a different approach would be, absorb with empathy. And then I accept responsibility. Anytime my value is questioned, I want to say, I must have done something. I must not have... Because I'm so sure that if you knew how valuable I was, you wouldn't be asking this question. And the only reason you're asking this question is because you don't know how valuable I am. And how could you not know? It's because I didn't communicate clearly. So I would accept responsibility for that. Say, "I'm sorry, Michael, the fact that you ask that question makes me feel like I must not have communicated really effectively. Could we back up?" And so I take them right back to that experience and go, "Right, cool. Here's where you are today. Here's where you want to go. The gap is this. here's how we would close that gap. The fee for that is this." Boom.
And I would avoid that other firm. And if that didn't work, the last era would be, "Oh, by the way, that other firm doesn't do this, this and this." Right?
Truly Differentiated Advisors Have Far More Pricing Power Than They May Realize [13:58]
Michael: There's another sort of aspect of this. I love your point of recognize that sometimes challenging pricing conversations are not actually a pricing conversation problem. It's an upstream problem.
So, we did a podcast recently for Financial Advisor Success with a guy named Micah Shilanski. So Micah runs a practice up in Alaska. He has written the book literally on federal employee retirement benefits. And all the weird specialized rules, all the funky government rules, how you convert CSRS voluntary contributions into Roth dollars on a tax-free basis. And Micah charges 1.5%. And so that kind of stood out to me when he was sharing it on our podcast. Sort of going rate is 1%. How do you explain this? How do you reconcile it? He said, "Look, at the end of the day, we have such a specialized unique expertise because we do this particular thing for this particular niche clientele that literally no one else does." So, go to the other guy that charges 1%. They literally can't do for you what I can do for you because they don't have the expertise in people just like you." Now, Micah can't say that about everyone, just about the particular niche people that he serves. But he said he's had this come up periodically. He had a client that came in, challenge him on the pricing, and he was like, "Fine, you think the other advisor can do this stuff for you? Go see them. Come back to me in a couple of months, let me look at your situation, and if I can't add value in that meeting, fine, move on." And now that guy's client's paying 1.5%.
I find there's such an obsession these days about pricing and competing on price, the point that every time we have a guest like this on the podcast that charges above 1.5%, we usually get a lot of flack. "That advisor's overcharging. That's not fair. That's not appropriate." And seems to miss, this is what happens... when you're stuck in a commoditized environment because you're really not differentiating, it all becomes about price. For Micah, it's not about price. He does a thing that literally no one else does. So there is nothing to compare to. Now, he still has to deliver value for what he does. But competitive price shopping basically doesn't happen when you literally do a thing for a unique niche group of clients that no one else does. It takes the price comparison off the table. That to me is part of why I advocate so much around niches and specializations. Micah's is particularly technical. You don't quite have to go that route necessarily.
But, this is the truest sense of differentiation, when you can say to a client with a straight face, "I know more about people like you than anybody else out there. So, go ahead and go to another advisor, you aren't going to get what you get from me." And we don't just say that because we think we're really awesome with designations and comprehensive financial planning and all that. It's really true because you're actually that specialized and differentiated. And then you saw that upstream problem, you don't get a lot of pricing conversations. You still have to demonstrate your value but not relative to anybody else.
Carl: Yeah, so good. So good. And I think one of the key issues there like you said, he literally wrote the book. Right? And I would imagine therefore, there are plenty of people coming from upstream that know, you wrote the book on this. I fit in this thing. You know more about... I am one of your people. And I think that that... And what I'm saying is, the differentiation could also be like, I helped you understand what your sort of purpose around money in a way that nobody else... I remember having one of advisors that does this kind of work say to me, where a client got a cold call. Right? And the client called, you know, the real advisor back afterwards and it's like, it's so funny. I almost want to say to them, you have no idea what you're even talking about. You know what I mean? My advisor knows me so well and knows my problem, whether it's Micah's specific problem or retirees specific problem or just the fact of humanity or whatever, I work with... He knows me so well that it's not even what you're saying right now is just blah, blah, blah.
Why It's Important To Have A Story That You Believe In (And Can Articulate) [18:42]
At that point, there is no pricing pressure. Now, one thing that we should sort of wrap up here on because we...is the straight face thing you said. Right? I think that's the really important thing is you have a story whether you price retainer, hourly, AUM, whatever it is, that you have a story around the pricing that you believe and that you can articulate.
Michael: And just that... I mean, I think that there are two key pieces there. That you can articulate, right, be able to tell the story of your pricing, whatever it is. AUM happens to be an easier story. It's like it's a percentage of that number, right? So when we get a standalone planning fees, I see advisors like, they'll tie it to income, they'll tie it to net worth, they'll tie it to the number of hours they put in. Right? We come up with some story to connect it. But the other piece of it is just that as you said, you have to believe in it. One of the most striking things we saw from our XY Planning Network benchmarking study, we've been doing it a couple of years now. You know, they're all advisors that charge fee for service, standalone fees, retainer fees of some sort. And the phenomenon we found was 100% of advisors raise their fees in their first three years. One hundred percent raise their fees in the first three years.
And it all essentially comes down to because after we get a client, few clients saying yes, and we start really believing in our value, truly believing in our value. They got the pricing confidence to say a higher number with a straight face and believe it enough and convey it with enough confidence that the client said yes to. I think a lot of the time on these pricing conversations, our own self-doubt is overwhelmingly our own worst enemy because the moment that doubt creeps in, the clients can tell as well and that's when the questions come. Right? When you just say, "My fee is this." Oh yeah, and you say it confidently with a straight face? You usually don't even get a lot of questions I find because people are just like, "Oh, well, crap. I guess that is what it is." That was so just confident. When you put that hesitation, when you've got the self-doubt, people pick up on it and that's where the questions start.
Carl: I agree. I think, most of the time you don't have a pricing problem, you have a "you problem." Right? Or another way to say that would be a confidence problem. And maybe we can wrap up on this, it just made me think of I was just, we live in New Zealand right now and we're doing a lot of whitewater kayaking. And we were up in the in this town that's like in the middle of all the rivers and there's this world-renowned whitewater school there. And the guy who started the school is a legend, a legitimate whitewater legend. And his name is Nick. And I needed to buy a new paddle and things are more expensive in New Zealand than they are.
And I knew I could get it from the States and have it shipped over and I was like, ah... And so I go in to by this paddle and the, the lady running the store was just like... It's sort of like a store that's if there's no one there and there's a sign that says, "Hey, we're in the workshop, come get us." It's not a big store like you're thinking. I go in and I'm like, "Hey, is there any discount for New Zealand residents? We live here. We're just not tourists coming through." I love it when, it reminds me of your story, Michael, we do this, you know, I think that level of... She said to me, "You want to know what Nick would say if you asked him for a discount?" And I said, "Yeah, actually, I do." And she said, "He would say he's only given a discount to one person, his dad and he's dead." I was like, that's...
Michael: Alrighty then.
Carl: And one more, Seth Godin. I learned this from Seth, which I thought was great. Seth charges a decent number for his speaking engagements. I don't know what the number is but I'm sure most people just say, "Hey, is there any discount?" His response is, to be fair to everyone, "the fee is the fee". Which I think is awesome because it shifts the burden...
Michael: Oh it does.
Carl: Right? It's not me.
Michael: I don't want to be unfair. Oh my god, that's a lot of money, but I don't want to be unfair.
Carl: And it's also true. Right? The client, the nice friendly client who valued and was willing to pay for your service shouldn't be punished because they were the nice friendly client and weren't a jerk and tried to...you know, whatever. Jerk is too strong of a word, but you know what I'm saying here. So anyway. Man, there's so much more we...
Michael: To be fair to everyone...
Carl: The fee is the fee.
Michael: The fee is the fee. I think that's a good place to wrap up.
Carl: Amen. Thanks, Michael. Oh, you know what we should mention real quickly. There's 50 million places, if you haven't seen Michael Kitces' work, you're living under a rock. But where's your favorite place for people to see what you're doing?
Michael: So, people can come find me at kitces.com. Just Michael Kitces is the name, Kitces.com is the website. And what's the best place for people going to find you now?
Carl: Really, I think the work we're doing is really central around realfinancialadvisors.com. So realfinancialadvisors.com.
Michael: Have you bought Real Financial Advisers with an E to redirect to Real Financial Advisors with an O?
Carl: I don't know. I'm like that's a whole... that's one of the pieces of feedback we got, industry professional adviser, advisor. We'll talk about that later. Thanks, Michael.
Michael: Thank you, Carl.
Disclosure: Michael Kitces is a co-founder of XY Planning Network, which was mentioned in this article.
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