Setting a new price for financial adviser services

Price is the amount of money expected, required or given in payment for something; value is what something is worth, the level of regard in which something is held.

Financial advisers should remember a key truth about their relationship with their clients: While they might set the price of their services, clients decide the value. If a client’s estimate of value falls below an adviser’s price, there is a problem in the relationship.

Setting a price on a service is a challenge in any industry, so it is no wonder that some advisers are wrestling with the issue of whether they should be flexible in their fees or stick with a standard offering, such as 1% of assets under management.

Some advisers say they never negotiate their fees with clients: They set their fees and hold to them, and suggest to any prospective client who wants to negotiate that perhaps another adviser would better suit their needs. That is their right.

Others are willing to negotiate lower fees in some circumstances, particularly for large asset pools. That is also their right.

The standard fee of 1% of assets was not handed down from Mount Sinai, and there is no rule or regulation that says all advisers must charge such a fee. The average in the industry is actually a bit lower than this, though some advisers are able to charge more if they have highly satisfied clients or offer additional services.

Some advisers might feel they can do as well financially by reducing fees to attract more clients, while still providing an acceptable level of service.

But given the advent of robo-advisers, all financial advisers should be reviewing their fee structures, their services and their marketing approaches, recognizing that there is now more competition for clients.

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Clients and prospects who think they do not need the help of a full-service adviser, or who object to paying 1% of assets under management each year, now have alternatives. There is likely to be some leakage of existing clients who do not understand the value of the full-service adviser, and prospective clients who decide they do not need all of the services.

When the supply of a product or service increases relative to the demand, the price of that service generally declines, so financial advisers should expect some price pressure. Their profession is not likely to be immune to the laws of economics and the market place, or the effects of technology.

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Technology has brought benefits. Computers have made it possible for advisers to serve more clients and oversee more portfolios than they could 40 years ago. Cell phones have made it easier to stay in touch with clients than it was 20 years ago.

In short, technology has enabled advisers to be more productive. Perhaps some of those productivity gains should be passed on to clients.

On the other hand, technology has also generated some threats — robo-advisers being just one. The increased computing power available to financial firms has made the stock market far more efficient, but it has also made it more difficult for actively managed portfolios to beat the market and add value, and therefore for advisers to add value by finding mutual funds that will outperform.

Advisers will now have to work harder to justify that 1% of asset fee to clients, especially by touting services beyond mere investing. They will have to spell out clearly what added services they provide, such as identification of a client’s true risk tolerance and guidance in allocating assets to meet that tolerance; a calm hand to help the client avoid being overly optimistic in bull markets and overly pessimistic in bear markets; and, of course, any additional financial planning services such as college or estate planning.

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Ultimately, each client or prospect will decide whether the value of those services equals the adviser’s fee. The adviser can accept or reject the client’s decision, and the free market will have worked.