For the past several decades, the prices that consumers pay for financial products have been trending lower and lower. From the rise of discount brokerage in the 80s, to no-load mutual funds platforms in the 90s, online brokerage in the “aughts”, and robo-advisors in the 2010s, the cost of investing has decreased steadily and dramatically. Accordingly, a recurring concern over the past decade has been whether the “fee compression” in financial products will eventually spread to financial advice as well. Instead, though, the opposite has been true, as our own Kitces Research shows that there has actually been fee expansion when it comes to financial advice, as the typical price that advisors charge for standalone financial plans, retainers, and hourly rates has been on the rise (and even AUM fees have remained remarkably stable!). Which suggests that, as the industry has become more focused on the advice side of the equation (and less on product sales), advisors have had to up their game… and in practice really are delivering far more value to their clients than they ever have… to the point that they’re even able to charge more for it!

However, as the advisory world transitions fully to advice fees and the debate between commissions versus fees begins to fade, a new sort of industry conflict is rising to take its place: where advisors who charge fees are criticizing each other for whatever fee model they’ve chosen to utilize within their practices, and the suggestion that their particular fee model is superior to all the others. Which raises the question: is the debate about the “best” advice fee model another version of consumer education (akin to teaching consumers about the difference between fees versus commissions), or are advisors charging fees becoming too focused on differentiating on price (or pricing model) instead of focusing on the range of value that a range of advice fee models can support?

In our 56th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss the emerging new advisor fee debate, why advisors may be missing the mark on the core issue at play, and how advisors could reframe their discussion in order to help move the profession (and their own practices) forward.

As a starting point, it’s important to remember that in an industry with a lot of compensation excesses, it has been a tried-and-true tactic for financial advisors to build their businesses over the years by pointing out that their costs are lower (making it more feasible to deliver better performance) than their competition. Yet at the same time, it’s important to remember that there’s a difference between advisors who charge a lot for very little service, and advisors who charge a lot for a lot of service (that not all clients may want to buy and pay for… but some do). In other words, while there are certainly advisors whose rates are “high” (in absolute terms), the central debate shouldn’t be around the fee itself (or what it’s based on), but rather the value that a client is actually getting for the fees they pay. Or stated more simply, the issue isn’t whether a certain fee (or fee model) is good or bad, it’s whether the fee itself is justified for the value it provides to the particular type of clients being served.

From a client-facing perspective, meanwhile, advisors might consider focusing on all the services (and value) they provide when meeting with prospective clients, rather than highlighting the fees that other advisors may be charging. Because, at the end of the day, when advisors ask good questions and emphasize the positive effect that they have on their clients' lives, prospective clients will be able to connect the dots themselves and understand if the service that they’re getting (or not) from their current advisor is worth the fees they’re paying.

Ultimately, the key point is that advisors who win business on price run the risk of eventually losing business on price (and/or simply attracting the most price-sensitive clientele). Which means for advisors focused on long-term relationships, making clear the real value of financial advice (and what that looks like on an ongoing basis) turns the focus away from why a prospective client may or may not be paying too much, and towards their pain points and the issues that they need help with. Because it’s the emphasis on the positive work that advisors do, and the outcomes they facilitate for their clients, that will push the profession (and individual advisory firms) forward.

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For most of its history, the financial advice industry has been almost exclusively transactional in nature, which meant that advisors would usually interact with clients only when there was a new sales opportunity. The need for interaction only once every few years meant that advisors could have literally hundreds of clients, and it was virtually unthinkable that an advisor would ever choose to or have to turn anyone away. But, as the industry has shifted towards a more ongoing, relationship-driven model, it’s become increasingly common for advisors to find that they’ve hit a capacity wall and simply can’t take on more clients. And once at capacity, many advisors have either raised their fees (so that more prospective clients self-select out of the engagement process before ever reaching out) and/or sought to add capacity (by bringing in additional advisors and staff).

However, for those advisors who aren’t interested in increasing headcount (because they aren’t keen on managing people) or don’t want to raise fees (because their current pricing works for the particular niche they’re targeting), many have turned to implementing waitlists as a way to manage their capacity, at least in the short-term. Which, in turn, raises the question: is implementing a waitlist really the best way to handle capacity limitations, or is there a better alternative?

In our 55th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss the motivations that might drive an advisor to implement a waitlist in their practice, the unintended consequences of a waitlist, and a key mindset shift that advisors can make when thinking about their desire to manage their limited capacity with a waitlist.

As a starting point, it’s important to distinguish amongst a couple of different circumstances behind the use of a waitlist. On the one hand, for the advisor who is actively expanding their capacity by hiring more staff, a short waitlist might be unavoidable if there’s been a sudden influx of new clients, and it’s logistically impossible to onboard everyone all at once. On the other hand, some advisors have intentionally capped their growth pace, and implement a waitlist that (in some cases) might be up to 18 months.

For that second subset of advisors, it’s important to recognize that their decision to put prospective clients on a waitlist comes from a deep desire to help, while realizing that it’s impossible to help everyone (because an advisor who says “yes” to more professional opportunities than they can handle is also actively saying “no” to other things in their life). Unfortunately, though, that decision comes along with some unintended consequences, as people who reach out to financial advisors invariably do so when they have an acute pain point that they need help with right away, and telling those people, “yes, but” means that they often aren’t getting the help they need when they need it (and will just go elsewhere anyway). Instead, it’s perhaps the better response for advisors to simply say they aren’t accepting new clients at the moment and (as an alternative) recommend those prospects out to other advisors who do have the capacity to offer the immediate help the prospective client is seeking.

Ultimately, the key point is that, while it may make sense to implement a waitlist as a way to manage growth and capacity, the reality is that the longer the waitlist gets, the more the risk that advisors end out rejecting clients who, not knowing where to turn, may not get the help they need (or worse, seek it from an advisor who doesn’t do a good job for them). And while some advisors may worry that referring potential clients out will empty out their pipeline and leave them without prospects when spots do open up, it’s important to realize that simply getting to a point where there isn’t room for more clients means that the advisor must be doing something right, and can move away from the scarcity mentality all advisors have as they build their businesses. Because advisors who are at capacity and choose to refer prospective clients to good advisors, at the end of the day, are actively helping those people and moving the profession forward.
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