Asked what made him a great hockey player, Wayne Gretzky famously replied, "A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be." This has profound meaning for our industry. How can financial advisors remain competitive and profitable in an industry increasingly dominated by products, rather than services? The discussion always comes back to fees: How much do you charge your clients and for which services?

But is the problem only a commodified marketplace? Or is it that financial planners themselves have compromised the value of the service that is the foundation of nearly all client relationships: investment management? If so, what's the solution?

The Creation of Fees

The concept of providing investment management through an advisory pricing model caught on several years ago. And it was good. So good, in fact, that everybody wanted to provide the same types of services for a fee. Advisory platforms and managed accounts became widespread at the same time as no-load mutual funds, exchange-traded funds (ETFs) and discount brokerages helped convince retail investors they could do it all themselves.

The effect on the financial advisor's psyche was profound, and the response was natural: Deliver distinctive value beyond investment management. Many advisors decided to offer additional services to their advisory clients, including cash flow analysis, retirement income planning and comprehensive financial planning. This is an appropriate response to the evolving marketplace, and there is real value in these services. But, in many cases, these additional services were simply bundled under the existing advisory fee and implemented at no additional cost.

Think about it: How can any business add services without charging for them and maintain a healthy structure? This strategy led to the devaluing of both investment management services and financial planning services. It was almost as if advisors were conceding that asset management is pretty easy, so why not throw in the financial planning for free.

Where the Puck Is Going

Will you be able to remain profitable and give your clients good service in the future, when your compensation is tied to an AUM fee on portfolios that are being drawn down? As your major client demographic marches toward retirement, even investors with modest assets will request detailed retirement income plans or have other planning issues that require your expertise, all of which can drastically eat up time.

The opportunity—and the solution—lies in implementing an annual planning, retainer or consulting fee. At Commonwealth, we call this approach the "inverted pricing model." Many of our advisors are using it with new clients, while acknowleging it presents challenges for existing clients who have been receiving "bundled" services.

The inverted-pricing approach has another advantage as well. By enumerating and charging for the services you provide outside of investment management under a separate pricing structure, you're supporting transparency, an idea embraced over the last decade by investors, advisors and regulators.

How Inverted Pricing Works

1. Understand your services. To use this approach, you must fully examine the individual services you offer now, as well as those you plan to offer in the future. Picture how you work with your top clients and then list all your investment services in one column and your financial planning services in another. You'll be surprised by how long the list will be. To charge effectively, advisors must believe that each service has an intrinsic value—and realize that bundling them together reduces the value of all the services.

2. Remodel your pricing structure. Now consider your current pricing structure. Take a look at the chart on page 68 to see how you might structure your services and pricing model. It contains two kinds of pricing: one, a straight percentage of invested assets, for investment management, and the other a fee for planning services.

For many advisors who are transitioning from investment management to financial planning and making comprehensive services the cornerstone of client relationships, it makes sense to begin by discounting the advisory fee and then charging for any planning projects you do. The net result may represent little change your compensation. But by establishing a new cost/value structure for financial planning, you reinforce in clients' minds what they are paying for. You may want to allow clients to select only the services suitable to their situations (advisory, financial planning, or both). Change isn't easy, especially during a volatile market. But remind yourself that your clients hired you to handle their complicated financial affairs, and they view your wisdom and experience as crucial to meeting their needs. Inverted pricing can ensure the services you provide are always valued—and valuable.