Though the advisor marketplace has increasingly converged on a fee of 1% of assets under management, there’s no clear standard pricing practice when it comes to fee-for-service planning.

While some advisors back into a price based on the income they desire and the billable hours they can put into the business, others price their services based on the perceived value to the client.

Irrespective of approach, the key metric for determining whether you are priced properly is your prospect conversion rate. Not doing this yet? It’s a cinch — but there are some important caveats and computations to bear in mind.

Understanding conversion rates: In our industry, a conversion rate is an expression of the number of qualified prospects who decide to become clients. “Qualified” is an important modifier here. If you charge $3,000 for a comprehensive retirement plan fee and work mostly with retirees, you still may meet with a 32-year-old doctor trying to repay graduate student debt. But when she decides not to work with you, it’s probably not because she rejected your pricing, but because she’s not the right fit in the first place. After all, you work with retirees, and she’s looking for student loan refinancing strategies.

The question really is how many qualified prospects you should talk to who could ostensibly do business with you, and then how many of them actually decide to do so. This is a simple ratio to track. If you meet 10 qualified prospects and three do business with you, your conversion rate is 30%. If eight out of 10 do business with you, it’s 80%.

Advisor fee survey results


Here’s why the numbers matter: Your conversion rate with prospects is a direct statement about whether your value proposition is perceived as worthwhile.

You can basically break this concept into four tiers: those advisors closing fewer than 25% of prospects, those who close 25% to 50% of prospects, those who convert 50% to 75% of prospects and those who convert more than 75%. Conceptually, we could call these Tier 1 (<25%), Tier 2 (25-50%), Tier 3 (50-75%) and Tier 4 (>75%).

Tier 1: Simply put, if you fall into Tier 1, you have a problem. Unfortunately, the problem is often hardest to diagnose when you’re treading in these waters, but it is usually traceable to one of two culprits: Either your pricing is just too high and unrealistic for the proposition you offer, or you need to work on your sales skills.

If you find yourself in this category, try to do some price comparisons with other advisors in your area of expertise, just to ensure you’re not totally off base. It may be you need to look at sales training to learn how to better communicate your value proposition and how to turn prospects into clients. While every now and then it’s a pricing problem, usually it’s a sales training problem.

And this isn’t applicable to advisors just starting out. Even if you’re a fiduciary, no products, fee-for-service, fee-only planner, you still have to learn to sell your services. After all, it doesn’t matter how much value you provide if you can’t convince anybody to pay you for it.

Tier 2: If you’re converting around 25% to 50% of the qualified prospects you meet, you’re in good company. Most advisors I meet fall in this category.

For most firms in Tier 2, the mere fact that you’ve gotten to a 25%-plus close rate means your pricing is at least reasonable. You should also feel pretty good about the value proposition you’re providing. It may not necessarily feel good to acknowledge that more than half of the people you talk to tell you “no.” But again, by closing at least 25% of the prospects you talk to, your pricing can’t be all that far off. Some people are saying “yes.”

Still, it’s natural to think about how, if only you could close two-thirds of your prospects instead of being rejected by that sum, you would grow a lot faster.

That may lead you to cut your fees to bring up the close rates. But that’s not the right way to do it. Look to your sales process — maybe you could still use some training to learn how to create better rapport with prospects or learn to better communicate your value — or look to your marketing process and figure out if you could better target your marketing to get prospects that are more likely to be a good fit in the first place.

For instance, I see a lot of firms with Tier 2 conversion rates who have, say, a $250,000 minimum. They’re getting in front of prospects with more than $250,000, but they manage all their clients’ portfolios on a discretionary basis and keep receiving prospects who say, “Well, I don’t really want to turn over my portfolio, I just want to pay you for a little advice along the way.”

So yes, technically the prospect was qualified to work with you, but your marketing might’ve communicated the type of investor you want to work with better, e.g., “We work with people who delegate their portfolio management to a professional so they can spend more time enjoying their lives.” With such a message, those hit-and-run artists would screen themselves out before ever meeting with you.

The solution here isn’t to try to cut your prices, but to ensure your marketing message attracts people who are most likely to work with you, at the fees that you charge.

Tier 3: Advisors who see 50% to 75% conversion rates of the qualified prospects they meet with generally are in what I call the sweet spot. It’s virtually impossible to get every prospect who comes in the door to do business with you, so when you’re converting 50% to 75% of them, you’re doing something —indeed, many things — right.

These rates are most commonly seen by advisors who have some kind of niche or specialization. It doesn’t have to be super narrow, e.g., “I only work with radiologists.” It could be something like, “We work with retirees who prefer to delegate their portfolios so they can go live their lives, and we’re really good at retirement planning for them.” Consequently, all the firm’s marketing is focused on retirement planning for that particular type of customer.

The second type of advisor in Tier 3 is one who was once in Tier 2, but rather than getting better at their marketing and sales, they just cut their fees or never really charged enough in the first place. And so they get here despite not really having a very refined value proposition or marketing or sales process.

To this advisor, if you say, “Describe to me who your ideal target client is,” and they respond with something very broad and generalized, e.g., “people with money or assets who can afford my services and want to pay for my advice,” they are probably priced too low and are making up for weakened sales and marketing with cut-rate pricing.

That’s a problem for any firm with aspirations of growth. Sure, you may be growing, but it may simply be because you’re priced so low that the majority of people say yes anyway. And at some point, it will become difficult to afford the staff you need to grow and scale your business. That’s because you’re not actually charging enough. And you solved what really was a marketing or sales problem by underpricing instead of actually solving your real marketing and sales problem. You lacked a clear value proposition for a clear target clientele.

Tier 4: For those who convert more than 75% of their qualified prospects, there’s only one thing to say: Raise your fees. You are simply priced too low if you are closing more than 75% of the qualified prospects that you sit in front of.

This is a somewhat controversial position. Firms with high close rates might respond, “My clients like me and they’re happy to pay me what I charge them and I’m growing, so what’s the problem?” Yet even if you price, market and sell a great value proposition, there should still be some tension where a prospective buyer has to think, “Do I really want to pay for this service?”

Think about it this way. If 80%-plus of your prospects will pay your current fees, then it’s virtually certain that 70% of your prospects would probably stay on even if your fees increased by 20%. If your conversion rate drops by 10% and you raise your fees by 20%, you are making more money and you’ll actually have to do less work.

Put another way, if you’re closing 75% or more of the prospects you see, your value is compelling enough that most would pay more and not think twice about it. You’re making it too easy. They don’t have to think. While this may feel great personally because it simplifies the sales process, you end up doing more work for less money. Then you have fewer resources to hire more staff to grow your business and scale up.

Stated more simply, yes, there really is such thing as having too high of a close rate.

Tracking the ratios: If I asked what your current conversion rates are, you might not know because you simply don’t track it. And if you’re not, you need to start. Just three numbers are all that’s needed.

The first number is the number of leads you get. The second number is the number of qualified prospects you get — i.e., people whose financial wherewithal and investing disposition align with your style. Remember, a lead is interested in doing business, whereas a prospect is someone who’s actually qualified to do business with you. Lastly, number three is the number of actual new clients you bring aboard.

With these three numbers, you can figure out the relevant conversion rates. If you divide the number of prospects by the number of leads, you get a sense of how well targeted your marketing is. If you have good marketing, most of the leads turn out to be qualified, and your lead-to-prospect ratio is high. If your marketing is too generalized, you receive lots of leads but relatively few who are qualified to do business with you, leading to wasted time and a very low ratio.

In turn, now you can divide the number of clients into the number of prospects and figure out what this key prospect conversion ratio is. If you had 18 prospects last year and you closed six, you had a 33% close rate — a typical advisor close rate. If you closed 10 prospects with well-targeted marketing, you’re in the sweet spot. If you closed 14 or more out of the 18, you need to raise your fees.

Take these numbers into the coming year — and of course, take the time to track them in the first place — and you may find that the key to optimizing your conversion rates has been hiding in plain sight.

Michael Kitces

Michael Kitces

Michael Kitces, CFP, a Financial Planning contributing writer, is a partner and director of wealth management at Pinnacle Advisory Group in Columbia, Maryland; co-founder of the XY Planning Network; and publisher of the planning blog Nerd’s Eye View. Follow him on Twitter at @MichaelKitces.