For the better part of a decade, the financial services industry has anticipated the coming of fee compression, mainly due to the rise of robo-advisors offering low-cost automated wealth management services. Yet even though fee compression has not been fully realized to the extent the industry has generally expected, lower cost robo-advisor services have still compelled financial advisors to maintain relatively low fees. But when advisors continually add services as a means to differentiate themselves from other advisors, keeping fees low can prevent those advisors from maintaining high-quality talent and services, not to mention being able to reinvest in the business to grow and scale.
In our 101st episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss the challenges advisors face in setting fees commensurate to their service offerings and the importance of charging sustainable fees to help businesses flourish.
As a starting point, it’s important to understand that staying competitive doesn’t necessarily mean advisors need to have the lowest fees. Many advisors have focused on obtaining deeper levels of expertise in broader areas and offering more in-house planning services in those areas (e.g., tax and estate planning) to differentiate themselves. Yet, in order to sustain these value-added services, advisors need to be able to offer competitive salaries to retain the talent responsible for providing them! Which is important, as salaries have become more transparent, enabling employees to find positions that will offer them the salary compensation they feel they deserve. However, advisors who feel obligated to keep their fees low but who also feel the need to continually add services to justify their fees often risk losing employees (especially the ones that are most talented!) and create more challenges for themselves to maintain ongoing success.
Importantly, reflecting on the quality and types of services they offer can help advisors identify the right (i.e., accurately comparable) industry benchmarks to compare themselves with, so that the fees they charge for the services they provide are in alignment with what they are actually worth. And advisors who offer premium services can justifiably ask for premium fees, which means it can be completely appropriate for firms that go above and beyond to adjust fees higher than what they may have been originally charging!
Ultimately, the key point is that advisors who offer above-average services should be compensated accordingly, which may require charging above-average fees. And while raising fees may feel scary for advisors who fear they may be asking for unreasonable prices, it can be worthwhile to consider that a small step increase of just 10% (e.g., asking for 1.1% AUM instead of 1.0%) can still yield a significant rise in revenue that would provide capacity for better services, talent, and tools. Many advisors join the industry to help clients achieve their financial goals, and by charging the right fees that are commensurate with their expertise and value, they not only position themselves to remain competitive, but they also ensure that they have the means to sustainably grow their businesses!
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