Executive Summary
As with many labor-intensive professional services, financial planning is not inexpensive to provide for clients. There are overhead costs, potential staffing costs, regulatory and compliance costs, in addition to the costs for software and services to support how professionals deliver their value. Accordingly, all of this is wrapped into the price that financial planners must charge their clients to earn a reasonable living and an adequate business profit. Yet often clients balk at the cost of financial planning. Which begs the question - if your clients think financial planning is expensive... to what are they comparing that cost?
The inspiration for today's blog post comes from a fascinating blog I read by Peter Shallard about why clients/customers don't want to pay your rates (generalized for any professional service). In the post, Peter discusses a situation that came up for him when he was a privately practicing psychologist, and had a prospective client tell him that his rates were too expensive (to treat the patient's addiction problem). In response to the assertion that he was too expensive, he asked the client a simple question: "compared to what?" After pausing for several moments, the client replied with the only cost comparison that came to mind: piano lessons. Huh? What? Comparing the cost of being treated for addiction to anti-depressants is like getting piano lessons for your child?
The point that Peter makes is that anytime someone states your services are too expensive, almost by definition they're comparing the cost to something else and deciding that you're not worth the value. Except often, we don't even realize what we're comparing the cost to, until we are asked to take a moment to reflect upon it. And at that point, it sometimes becomes clear that the client's anchor for making the cost comparison is somewhat absurd; and that may help the client to realize that your value may be better - and your cost more reasonable - than their initial impression suggested.
Peter ends his post by asking three interesting questions that I think are incredibly relevant for financial planners:
- What do your clients compare your price to?
- What are you comparing your price to?
- What would you like your clients to compare your price to (since they must and will compare to something!)?
The first question is something you can easily ask to any client who responds that your financial planning costs are "too expensive." The second question gets at what kind of value you set on your own financial planning services, and how you think about them; it's crucial in setting an appropriate rate for your services, and arguably is a reflection on how much you truly do or do not value financial planning.
The third question is about closing the mismatch between client and planner (professional) perceptions. When you think your rates are reasonable, and your clients believe they're too expensive, then the answer to "compared to what?" is probably very different for the two of you. So if you think your financial planning services are worth the cost - using your comparison point - then what do you want your clients comparing your costs to? And can you help reasonably guide them to that point, so they "appropriately" value your financial planning services?
This kind of pricing evaluation seems particularly relevant for planners who charge on an hourly basis - such as those from the Garrett Planning Network - but ultimately I think it's truly relevant for any planner who is paid for his/her services. It ties back to the fact that clients are often irrational (as are we!), but that human irrationality can still be managed and worked around to achieve the desired outcome.
So what do you think? How would you answer Shallard's three questions about the cost of your services? Can you think of any recent client conversations where this may have been a factor? Will you do something different in your client conversations going forward now?
Love the piano lessons story. Excellent food for thought.
I’m a Michigan licensed attorney. The Michigan bar compiles every couple of years a survey of rates for legal services within Michigan. I’ve incorporated into my engagement agreement the range for such services with a link to the full survey. I also add that based on my years of practice and experience in specialized areas that my market rates would fall at the higher end of the spectrum. Similar to the point made by Mr. Kitces and Mr. Shallard, this information provides a more meaningful frame of reference for the prospective client to evaluate fee considerations, which also helps in closing the engagement.
Seems like the RIA regulators (FINRA, SEC, & the States) would do well to compile the same info., for the benefit of the public.