The standard commentary about financial advisors is that, with the rise of robo-advisors, there will be fee compression as advisors cut their AUM fee schedules to keep up with the competition. Yet the reality is that industry benchmarking studies show the median advisory firm's fees haven't dropped, at all, in the past six years. In fact, advisory firms are more likely to be raising their fees than lowering them, both for some higher net worth clientele, and to ensure that all clients pay an economically viable minimum fee.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how to go about raising advisory fees in your firm, and specifically how to break the news of a fee increase to clients.
It may be surprising to hear that advisory fees have actually going up for many, but the reality is with the rising competition in price, there has also been increasing competition in services. In other words, it is true that as financial advisors, we have to do more than ever to justify our fees. Yet by bolstering everything from our service levels to our deliverables and our expertise, many are finding that they're doing so much more, they can actually charge more than they have in the past. So, if you find yourself needing to have this conversation, what is the best way to have it?
First, recognize that there are better and worse times to have this conversation. Ideally you want to have this conversation when the market is up, because clients will feel better about handling a fee increase when the market, their incomes, and their net worths have already been trending higher. Next, be sure that you first reinforce your value. Sometimes clients genuinely need a reminder of all of the things we do for them, especially over time. And then, you can hit the key elements: start with a positive message, explain why you're going to raise fees, state that you are going to increase fees in the future, and be confident and transparent in communicating your new fee.
In fact, if you want to successfully raise your fees, the last point about confidence cannot be overstated. Successful fee increases are usually more about the advisor's confidence in their own value, than whether clients perceive the value. Because the reality is that if clients didn't perceive the value, they wouldn't likely have stuck around so long in the first place. But if you don't believe in yourself and your value proposition enough to believe in the fee you are asking for, then clients won't believe it either!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
Today I want to talk about fee increases. And I know lately it's really popular to talk about fee decreases and whether advisory firms are going to have to cut their fees to compete with robos and new technology. But when we look at the actual industry benchmarking studies, the median advisory fee hasn't actually dropped at all in the past six years despite all this technology coming in. And, in fact, for some higher net worth clientele, folks with a couple million dollars, the median advisory fee is actually going up in recent years. Not a lot, but it's moved up a little bit.
And, you know, I think part of this is just, as the competitive demands continue to rise and as we have to do more and more to our clients to justify our fees, I'm actually starting to see more advisory firms that then come back to the table with this question:
"Well, if I'm doing this much more for my clients, maybe I need to actually charge a little bit more. But like how do I communicate a fee increase? How do I put through a fee increase?"
Perhaps you're doing more for clients... or maybe you've got a longstanding client who got a deal when they joined the firm originally and now you have to lift them up to get in line... or, as is the case for a lot of firms, this is a fee increase primarily for their smallest clients who just don't generate enough revenue to actually be clients that they can effectively service and profit from (e.g., a minimum retainer fee to lift them up), but in any case, you have found yourself in a situation where you need to raise fees.
So how do you do it? What's the best way to communicate a fee increase?
Communicate A Fee Increase When Markets Are Up [Time - 1:51]
First and foremost, it's worth recognizing that there are better and worse times to communicate a fee increase. In general, you kind of want to do it when markets are up, income is up, net worth is up. Basically when times are good and people are feeling good about their money. Because if times are bad and the client is feeling very cashflow constrained, obviously, this isn't as likely to go well, not only because most people rationally want to cut expenses when times are bad, but also because there's a behavioral finance phenomenon called the "bottom dollar effect" that consumers tend to disproportionately apply blame to the last flexible dollar in their financial woes. And so, even if there's a lot of bad stuff happening in their financial lives, if you put your fee at the center of the conversation when they're feeling financially constrained, you draw attention to it, it's that time that they want to do some cutting, and this isn't going to go very well.
For most of us, that actually means now is a pretty good time to have this conversation if you've been thinking about it. Portfolios are up. Net worths are up. Income is up. Most clients are feeling at least relatively good about their financial situation (at least better than they did a number of years ago). And so, if you're going to have this conversation, now is about as good of a time as any to be putting forward the conversation.
Reinforce The Value First, And Raise The Fees Second [Time - 3:07]
If now is the time, the question still arises, how exactly do you break the news? Now, I've actually seen a lot of advisory firms go pretty much the exact opposite directions on this. Some just state it matter-of-factly in like an email or a letter to clients. "Dear clients, we've enjoyed working with you in helping you with your financial planning journey. But due to the ongoing increases and the cost of doing business, we are raising our fees at the end of the year. The new fee schedule will be such and such. Thank you for your continued business. Please let us know if you have any questions." That's it. They put it out there, and they say, "Here it is. Call us if you got a problem."
Now, other advisors I know prefer to do this in person and sit down across from the client and have that conversation style. "You know, Jim, we've been working together for many years now. And your portfolio is up almost 70% since we started working together. And we've had more than 20 meetings on various financial planning issues. And we're still charging you the same fee that we did when you first joined the firm. And since then, we've expanded our investment team to better watch over your portfolio. We've expanded our financial planning team by hiring young Charlie here, the paraplanner, to help serve you better. And we've decided that we need to adjust our fee schedule to recognize the full breadth of value we're now providing you. And so, beginning next year, we're going to be adopting a new fee schedule, such and such. Do you have any new questions about the new fee structure that I can answer?"
Now, either way, the message is actually pretty much the same in both cases. There's basically four key elements.
- Starting with the positive. "I've enjoyed working with you. We've accomplished a lot together." Because over the years, clients forget all the stuff that we do for them. I mean, I feel this all the time sitting down with some of our longstanding clients at the firm. I have to kind of remind them, "Do you realize how much stuff we've actually done together over the years? Do you remember where you were a couple of years ago and where you are now? We've come a long way." And so there's nothing wrong with starting out with a good reminder of all of that. It helps reinforce your value for what's coming next.
2. Explain why you're going to raise fees, because people are going to ask. Ideally it could be that you're adding new services or new team members to give them more value. It could just be an acknowledgment that costs have gone up and you need to charge more to do what you do now. People don't like cost inflation, but they do understand it. But they're going to want to know why. So answer it. Ideally, put the best foot forward, but answer the why question.
3. State that you're increasing fees in the future. It doesn't have to be the distant future, but no one likes an immediate fee increase. It makes them feel like they immediately need to do something, right? Like they need to question whether you're still valuable or not because the fee increase is about to hit, so they got to figure out like are they going to terminate you now or not. Don't put them on the spot. State the fee increase would be coming next quarter or in six months. Frankly, since we're only almost halfway through the year, I would just say, "It's going to take effect in 2018."
The good news is that that gives them time to actually evaluate whether they still think you're worth the cost and they don't feel pressured, which can make the fee increase more negative. Now the better news actually is, psychologically, not only does it not stress them as much when the fee increases in the future, but literally our brains...you discount future costs more dramatically, like they feel less scary, which basically means you can use behavioral finance to your benefit. A fee increase now is money out of my pocket now. A fee increase later is like "And I got to deal with it later." And you know what happens when later comes? They are still working with you. They enjoy working with you. It's too much of a pain to fire you because you give them good value on an ongoing basis. And they stick right through the fee increase.
4. State the new fee. Don't beat around the bush. If it's a new retainer fee, "The new fee is this many dollars." If it's a new fee schedule, "Here's the new AUM fee schedule." If you act embarrassed, like you're not comfortable with the new fee or you're not sure if the client will accept it, they probably won't. Because if they could tell you're wavering, they're going to press you on it. After all, even if you really are worth it, no one likes paying more. So if you make it clear, even imply, that maybe they don't really have to pay the fee increase because you might not really be pushing it through, guess what? They're going to push back on it, and you'll create more of a problem for yourself.
Successful Fee Increases Are Usually About Your Confidence, Not Client Value! [Time - 7:35]
And I think that last point bears repeating. You know, if you don't act confident in your own value and that the fee increase is worth it, your clients aren't likely to think you're worth it either. In other words, the single greatest driver of a successful fee increase that I see for most advisory firms isn't even actually literally about the value to the client. It's about you. It's about your confidence in your value. Because when you confidently communicate to the client that you're worth it and you back it up with some reasonable value that you're providing, they tend to believe you're worth it because they're comfortable working with you, and they have confidence in you. If they didn't, they frankly would've probably fired you a long time ago.
And it takes a pretty drastic increase to make a happy, satisfied client who's confident in you unhappy, so unhappy that they fire you. But they're not necessarily happy to find out they're paying more, which means if you open the door, if you are not confident about your fee increase and your value when you suggest to them that maybe this fee increase won't stick, they're going to challenge it and try to make it not stick.
I've actually seen this play out a lot with new advisors as well. When most of us start, we cut deals. We discount left and right because we're just trying to get our first clients and, in some cases, because we'll just do whatever deal it takes to get those first few clients. But most of the time, it's actually because we're not confident in our own value proposition. And then as we get more skills and more experience and more confidence in our abilities, we start to charge more because we're more confident in the prices that we charge.
I've seen a lot of advisory firms. And this seems to crop up the most at the ones that charge hourly and retainer fees, right, because all the value proposition is on you to demonstrate the value of your time. I've seen a lot of firms that raise their fees like 20%, 50%, 100% in their first year or two. They launch their firm charging like $1,000 for a plan. And within 12 or 24 months, they're charging $2,000 or $2,500 for a plan. And it's not because they got twice as valuable with two years of experience. It's because they got twice as confident in the value they're already providing and, you know, maybe got a little bit better with some experience.
But it's crucial to recognize this, that most of the fear you have about a fee increase is in your head. It's not actually about what the clients are going to do. It's your confidence or your lack of confidence in your own value proposition. A few weeks ago, we had Carl Richards on the Financial Advisor Success podcast talking about this. It's actually got a name. It's called the "imposter syndrome" that we often tend to question our own value. And the more our time gets valued, the more we start wondering like, "Aren't people going to realize that it's pretty easy for me to do this stuff because I'm very experienced at it?" and like "Why would they pay me so much?" If we start questioning our own value saying "Why would clients pay me $100 an hour or $150 or $200 or more?"... when we question our own value proposition and we show we're not confident in our value, clients aren't confident in the value either, and then they don't want to pay what we're worth!
Raising Fees, Losing Clients, And Making More Money [Time - 10:43]
Now, all this being said, it's worth noting you still may lose a client or a few if you raise fees. I mean some client is going to be on the line. They were already a little dissatisfied. And your news of a fee increase will put them over the line. And that will be the reason that they terminate you. But it's crucial to recognize that's not necessarily a bad thing, even from a pure business perspective.
Let's say you've been doing basic financial planning and you've been charging clients $150 a month ($1,800 a year), and you find out that you've got more experienced and specialized. You want to raise your fees to $200 a month instead. And it turns out when you break the news, 10% of your clients say, "Eh, sorry. Thanks, but no thanks".
Now, for most advisors, losing 10% of your clients all at once would be pretty traumatic. But you know what happens when you raise your fees from $150 a month to $200 a month? That's a 33% increase in fees. Now, I probably wouldn't frame it that way. I would just say we're increasing by $50 a month. But that's a 33% increase in fees. So you know what happens when you increase fees by 33% and then you lose 10% of your clients? Your revenue is still up over 20%. It's still up. You made more in higher fees than you lost in clients. And you know what the better news is? Your revenue is up by 20%, and you don't have to do as much work because you just got rid of 10% of your clients who don't value what you do. You raise your fees, lose some clients, and make more money doing less work.
I'm sure a few of you are thinking like "Geez, are you just trying to rip off clients by taking more money for doing less work?" But, again, this is the imposter syndrome. I'm not talking about trying to make more money for doing less work. I'm talking about getting paid full value for what you do and not doing busywork for people who don't value your time, because if you're worth it, if you're really worth it and you believe and know and confident that you're worth it, why on earth would you keep working with clients who don't value what you do and won't pay you what you're worth?
And so the bottom line simply is this. If you've been wondering or thinking about a fee increase and are really concerned about the impact the fee increase would have, stop for a moment and ask is the risk really that clients won't value what you do, or is the risk that you don't value what you do enough to believe and have confidence that you're worth the new fee? Because while it's important to frame the fee increase well (reinforce your value first, explain why you're raising the fees, communicate in advance, and be clear about the pricing), in most cases, the blocking point isn't really the value and the fee increase – it's our confidence in the new fee and whether we think we're worth it.
And if that's the issue for you, then yeah, it's fair to take a hard look at your business and make sure you're really providing the value. But, I'd also encourage you, go back, listen to Carl Richards' podcast on the imposter syndrome, (www.kitces.com/14 for Episode 14), and think a little bit about how much of this is a value problem and how much of this is in your head, in your own views, about your value. But in any event, I hope that's some food for thought about the idea of how to raise your advisory fees if it's time to do so, and why our confidence in our own value is actually the greatest determinant of whether this goes well.
So this is "Office Hours With Michael Kitces," normally 1 p.m. East Coast time on Tuesdays. Obviously, we're running a little late today. But thanks for joining us, and have a great day, everyone!
So what do you think? Do you need to raise your fees? Have you successfully raised fees in the past? What is the best way to raise fees Please share your thoughts in the comments below!
Lisa A.K. Kirchenbauer says
Michael, thanks for these great tips. We have begun a fee increase cycle this year (while the market is up!) and the team and I have spent a lot of time analyzing and preparing for these discussions AND we have more work to do. I have done a number of fee model and fee increase changes over the years and I agree- do not do them by email or letter. Deadly and that’s why we lost clients we didn’t want to, because we didn’t communicate it face to face. I appreciate the reminder of communicating the value and right now, we have the fee increase discussion at the END of our meeting when they have had a chance to reconnect with our value (plus all the other things we do during the year that they may not see, are on the agenda!) Thanks for the confidence building and important tips!
Michael Kitces says
Thanks for sharing. Great point about putting forth the fee increase discussion at the end of the meeting. Nothing like a meeting-full of providing value as a lead-in about a fee increase when necessary… 🙂
A lot of advisory agreements do not allow fee increases unless they are acknowledged in writing (i.e. an amendment) or through the execution of a new agreement. How would you suggest factoring this into the situation and at what point would you bring it up to the client that you need their signature on a new document to finalize the increase?
Michael Kitces says
I would probably bring the paperwork along to the meeting (if doing it in person) ready to sign. If “breaking the news” goes smoothly, you can ask them at the end to sign an updated agreement “to confirm we’re all on the same page about the new pricing structure”.
If the meeting seems more tenuous – and because I’m not a fan of putting clients on the spot with price increases – I’d let them know at the end that there’s some paperwork to update the advisory agreements that we’ll be sending out to them. And then send it out for them to sign the week after the meeting. Of course, many clients won’t sign paperwork and sign it back promptly (especially if it’s about them paying more), so plan to bring a physical copy with you to the NEXT meeting for them to sign, if they haven’t signed it and mailed it back in during the intervening time period. (If you announced the fee increase well in advance, I’m assuming there will be at least one more meeting between when you break the news, and when the fee increase kicks in.)
Matthew Jarvis says
Back in 2014 we did a fee increase for all of our clients with less than $300k in AUM (which we defined as our “C” level clients). This was an incredibly difficult decision as a firm but it was the right move. We sent the attached letter to 50 clients. 3 clients quit, but on friendly terms and 2 did not respond so we resigned from those accounts. All the rest signed and returned the form without objection.
My coach at the time (John Barron) recommended that we not offer any rational behind the fee increase other than the increased cost of business. His rationale, which I found to be true, was that when you give clients reasons for your decision it just provides something to argue about, so we kept it very simple.