A version of this article appeared in Wealth Management December 29, 2021.
When you’re just starting an RIA, one of the hardest questions to answer is, “What should I charge?” Since we get asked this a lot at Advyzon, I wanted to put together a guide to help firms who are just starting out figure out their pricing, and to help established firms assess if they’re charging enough.
How much does it cost to run my business?
Many of the public debates around fee structures focus on whether to use fee-based or AUM-based pricing, what billing frequency to use, which tier structure is best, and other technicalities. But when you’re trying to figure out pricing, or if you’re reevaluating whether your current price structure is working, start with expenses.
It’s the same advice you’d give your clients. You know the expenses you need to cover, both from a business and a personal standpoint, with your firm’s revenue. How you price your services needs to hit that revenue target. It’s the most important number to have in mind.
Start with time
Think about how much time you spend on each client you work with. Price out both new clients and existing clients, and be sure to consider crafting their financial plan, annual meetings, quarterly reports and billing, and impromptu calls throughout the year. How many hours do you spend per client?
This should give you a sense of how many clients you can serve per year, both existing and new. (As you think through this, make sure you set aside time to manage any non-client related tasks you aren’t outsourcing.)
Once you have an idea of the number of clients you can manage, as well as your target revenue, you can start to feel out what you need to charge per client to run your firm successfully.
Start to run the numbers
If you’re just starting out, the most important thing is to come up with a pricing plan, period. According to XYPN, 100% of new advisors update their fee structure after launch. So don’t expect to get everything perfect your first go around. (It’s worth noting that the majority of new advisors increased their fees after one year in business.)
Still, there are some things you can do to improve your chances of success. If you know your target revenue and how many clients you can take on, the next thing to think about is the type of client you work with.
If you start out with a book of business, you can test out different approaches to pricing using your typical client as a model. Would 1% AUM work? What about a tiered approach, starting with 2% and working down to 1%? Or, perhaps you could stick with 1% and supplement your investment management services with a flat, service-based planning fee.
If you’re starting from scratch and need to build a book of business, these numbers can help you find your niche. If you know you need to charge each client $X per year in order to make a living, you can determine the type of client you want to target. This can also help you say no to the wrong clients, which is easier than having to fire them later.
Think beyond the amount
It’s not just how much you charge clients, but how you charge them. If you’re starting an RIA after working at a larger firm, you’re probably used to a monthly salary. That schedule tends to work well for cash flow, since most expenses are monthly.
If you start your own RIA and bill clients quarterly, it can be challenging to plan a monthly salary. This is particularly hard if your quarterly revenue fluctuates significantly with the market, as it may if you’re charging a percentage of AUM. (Using average daily balance instead of a starting or ending balance can help with this.)
On the other hand, billing clients monthly can feel nontraditional, particularly if you have older clients who are used to the status quo.
You also need to consider how you talk about your fees and services. Or, better put, how you talk about your value. If your services feel indispensable to a client, the numbers start to matter less. Think through how you’ll discuss your offerings in a way that resonates with clients, and how you’ll continue to demonstrate and market that value in an ongoing way.
Don’t be afraid to adjust
I often talk to advisors who are scared to change their pricing model because they don’t want to ruffle clients’ feathers. But, working for a fee that doesn’t feel fair, or that doesn’t serve you and your business, is a recipe for disaster.
Instead, consider changing your fees, but plan ahead to do it in a way that feels like you’re helping clients versus inconveniencing them. Start several months out by emphasizing your value in a way that sets up your new pricing model. For instance, if you want to start calculating your fee using an average daily balance, you might begin talking about the ways you manage volatility in your practice.
Next, explain the new fees and why you’re implementing them. People know that businesses need to make adjustments to pricing, and transparency often goes a long way. Plus, doing this in advance of the change gives the client time to get used to the idea and ask questions or voice concerns.
If clients do have concerns, make sure to listen and take notes. Thinking through feedback may help you in conversations with other clients, and it may help you better position how you pitch your services in the future.
An open mind may actually be the most important thing when it comes to figuring out your prices as an advisor. After all, your business runs on revenue and profit, but it also runs on people.
It’s also important to remember you don’t have to come up with your pricing in isolation. Organizations, like XYPN, the National Association of Personal Financial Advisors (NAPFA), and the Financial Planning Association (FPA), are all resources to consider if you need help with pricing. Your custodian may have ideas, as well.
Read more about trends in pricing in Advyzon’s recent white paper.
