Originally published on Evidence Based Advisor Marketing

With investments becoming a commodity, advisors have shifted to demonstrating “value” by offering a wide range of other services.  At their core, these services involve comprehensive financial planning.

Yet, the feedback I consistently receive from my clients is that justifying their value remains a formidable barrier to converting prospects into clients.  Here are my thoughts on that subject.

The bundled fee issue

You can’t separate “value” from fees.  It’s surprising how many advisors don’t understand this relationship.

Most advisors still use the bundled fee model and charge a percent of assets under management.  Over time, those fees can add up.

The concern of your prospects is not:  Do you add value?  Clearly, you do.

Rather, it’s:  Is the value you provide worth the fee you’re charging?

That’s the elephant in the room.

Compared to what?

We make decisions about cost and value every day.  Do you buy custom made clothes or ones off the rack?  Should you purchase a KIA or a Mercedes?

Both options will serve your intended purpose.  The question is:  Is the additional cost worth it?

The greater the disparity in cost, the less likely you will choose the more expensive option.

If your prospects can get the same (or similar) value at a significantly lower cost, it’s unlikely they will retain you.

Options abound

Your problem these days is the number of cost-effective options available to your prospects.  These range from pure robo-advisors, to hybrid advisors from large fund families like Schwab and Vanguard.

The hybrid advisors offer comprehensive financial planning from qualified advisors, at prices significantly less than your bundled fee.

I see yet another threat, looming on the horizon:  Accounting firms.

I recently interviewed Michael Burch, Managing Partner of Welch LLP, a Chartered Professional Accounting firm based in Canada.  Welch has 12 offices and international affiliations.

I asked Mr. Burch what’s included in the financial plans prepared by his firm.  Here’s what he told me:  Cash flow budgeting and a snapshot of current net worth, planning for the cost of education, review of insurance needs and products, simple estate planning, tax planning, required annual savings to meet retirement needs/education needs/elder care needs/and other big future events, Review of financial acumen of clients and other family members, Recommendations on required annual returns/savings to meet goals.

I then asked for the range of costs for simple plans, plans of medium complexity (assets from $2M-$5M and complex plans (assets over $5M).  His estimates are in CAD:

Simple Plan: $2000-$2500

Medium complexity: $2500-$3500

Complex plan: Dependent on individual needs

Assuming your prospects can get similar plans in these general ranges from U.S. based accounting firms, and can deal with their investments either on their own or by using a hybrid advisor at a cost of 0.30 percent of assets (or less), you can understand why demonstrating your value in this context is a formidable challenge.

Change your model

A fee model based on the hope your prospects won’t discover more cost-effective options is not a viable business plan.

You should consider changing your model to relate your fees directly to the time and expertise required to add value to your clients.

Resource of the week

This article in Investopedia discusses a trend away from bundled fees and towards retainers.