Advisors: The Value of Planning is Zero if You Don't Charge for it

Written by: John Anderson | SEI

Last week, I got a letter from my accountant. This being June, I was a little excited, thinking that I was being invited to a client appreciation event or he was notifying me of an error that saved me thousands on my tax return.

Instead, I was disappointed to find that it was a bill. My CPA had the unmitigated gall to send me a bill for his services. Compounding my disappointment, I realized the bill was slightly higher than what I paid last year or the year before that – the nerve of that guy! After all, what did he do? He only:

Completed my federal, local and two different state tax forms

Met with me to go over 2015 and answer my questions regarding certain tax credits that I was eligible for

Electronically filed my returns and forwarded me both pdf and hard copies

Made himself available a few times throughout the year to answer questions from my advisor, my wife and me

This CPA billed me for his work and guess what? I paid it. As I was writing the check, I wondered: if I will pay a trusted professional for services that I need and value, why do most advisors shy away from charging for the work their clients value most? Why are most advisors not charging for the initial planning work they do?

How do we charge?

If you look at the client/advisor lifecycle, there is no doubt that the first year is the most important. Typically, advisors work their hardest in the first year, as they are gathering data, organizing clients’ financial lives and creating a financial plan. It is not uncommon to spend 30 or more hours devoted to each client’s financial future in that first year.

But traditionally, the advisor does that work based on the hope that the client will move their assets over to the advisor to manage for a fee (either transaction or AUM fee).

I have talked to many advisors who say that they can usually tell if a client will move their assets before they do the work or that it may be too high of a hurdle for some clients to pay a fee for the plan, so they don’t charge for the upfront planning work. In fact, in our survey Fees at a Crossroads, we found that only 26% (of 775 advisors surveyed) charged an upfront fee for planning services.

There is a disconnect here. If we don’t charge for planning, are we really a planner in our clients’ eyes? If the client only pays via the AUM or transaction fee, aren’t we telling them, through our actions, that the importance of our relationship is really around the investments and not planning? Why do we give away what the client values and charge on what they may not?

Advice or investments?

Let’s be honest; ongoing AUM fee pricing makes it easy for most advisors. Not having to ask a client for a planning fee eliminates a potentially uncomfortable discussion. The fee is deducted quarterly out of the account, buried in the statement and typically not discussed. But is easier always better, or does deferring the discussion set up a more problematic discussion down the road?

I’m not suggesting that advisors are having difficult discussions with every one of their clients today, but what about the next downturn? What about when clients start seeing fee discussions due to the press, competitors and the government talking about the DOL rule? My guess is that over the next 12 months, many clients are going to be wondering how they compensate their advisors and what they are actually paying for. Are they paying planning fees or investment advice fees?

Positioning

The good news about our business is that as independent advisors, many of us can experiment with how we price our services. Trying new ideas and strategies on a prospect can give you good feedback about running a better business. For those of you who don’t charge a planning fee, maybe it is time to try out a different conversation.

Here are a couple of ideas that may get you started:

Before anything else, make sure your custodian has the ability to name the fee type on your statements . If you can, rename your fee to “planning fees” or “financial planning fees,” rather than the more traditional “investment advisory fees” that typically show up in the statement. Call the fees what they are.

Discuss the value of planning upfront and then charge for that value . It is an easy way to check to see if the client is committed. If the client balks, are they really the best client for you? Have they fully comprehended the value of the work you do and the benefits of your services? If they don’t get it now, will they be a good client in the future?

Discuss the difference between the upfront work and the ongoing planning. Need help? See Why Your Clients Can’t Distinguish You from Other Advisors – and What to Do About It.

Still having problems with the conversation? Try discussing “onboarding fees,” rather than “initial planning fees,” with the client. By rephrasing the name of the fee, you may be able to show planning as an ongoing event and the upfront fee (where you spend a lot of hours and expertise) as an additional expense.

Paying for value

As I wrote my check to my CPA, I certainly wasn’t thrilled, but I saw value in what he did and paid what he was worth. I know there is value in what an advisor does; I know you need to be compensated for that value. So why do most of you give away the value for free and bury the conversation about that value in the statements? If you charge for your value, your clients may even value your advice more.