It’s a general principle of economics that price is related to demand. The more you charge, the fewer will buy (or are interested in, or can afford) your services; the less you charge, the more buyers you can attract. The key, of course, is to price low enough to attract buyers, but high enough that your business is still viable and profitable.
Yet in the case of professional services, comparisons on price alone are often difficult, and other factors weigh into the decision; as a result, it’s difficult to easily judge who really has the lowest cost relative to the value they provide. From the business’ perspective, it is similarly difficult to judge where you should really set your price in order to keep your business viable and profitable, while not dissuading clients due to cost.
Accordingly, a recent study on fee-based advisors suggests that many may not have the equation quite right, and may in fact be leaving significant money on the table.
The inspiration for today’s blog post was the story “Advisors not charging enough: study” from today’s Investment News. The article highlights a new study by software firm PriceMetrix which suggests, in essence, that clients are not as driven by price as advisors seem to believe, and as a result many advisors may be undercharging for their services. From the economics perspective, the study is suggesting that pricing for financial services must be relatively price inelastic, which basically means demand is not heavily impacted by (at least modest) changes in price.
The PriceMetrix results found that pricing was, in essence, “all over the place” and that the growth of advisory practices and the retention of clients seemed to have little direct relationship to their AUM pricing. In other words, there seemed to be little evidence that lower-priced advisors had more demand for their services than higher-priced advisors, implying that the former could charge more like the latter and still see a similar demand for their services. In other words, they appear to be undercharging what the market will bear, for no apparent benefit.
I will be the first to acknowledge that I think the study does have some flaws. They appear to group together virtually all types of advisors who charge assets-under-management fees, without any delineation between what kinds of services are actually offered. Perhaps the lower-priced advisors tend to offer investment management only, while the higher-priced advisors offer more extensive financial planning services, which means price elasticity and the connection of supply and demand may be alive and well in the financial services world; the pricing differences may simply be a reflection of different value-added services offered above and beyond the core asset management service.
Nonetheless, I still wonder how right the article might be. I have witnessed a lot of advisors experience a great deal of angst over the last few basis points of their pricing, when in reality I have trouble believing their clients are really that price sensitive. Of course, if we as advisors make lowest-price-down-to-the-basis-point a primary issue for clients, they will focus on it. But are clients really that price sensitive, or are we making them price sensitive by making the new client process so pricing-centric? Or alternatively, is “lowest price” really the factor you most want to compete by, to draw clients from your competition? How many firms would be better served if they focused on the quality and depth of their planning services as a differentiator, rather than the last few basis points of cost? And how do you know what your clients are really comparing your cost to, in the first place?
So what do you think? How sensitive are clients, really, to pricing (especially assets-under-management based pricing)? Are most clients really worried about the last few basis points? Is there a way that we could convey the value of financial planning and our services more effectively, to make price less of a focus, or at least shift the focus from “price” (how many basis points do you charge) to “value” (what do I get for my money) – since “highest value” doesn’t necessarily have to be the same as “lowest price”?