How to ask clients for a higher fee
PHILADELPHIA — Raising fees is usually a difficult topic to broach with clients. But financial advisors entering the discussion armed with the right preparation and value proposition may be in for a surprise, according to one expert.
“I promise you, I’m not being Pollyanna saying this: You’re going to see that these conversations are going a lot better than you thought,” advisor coach Diane MacPhee said in a session at the fall NAPFA conference.
The downward pressure on fees due to fintech innovation, competition, passive strategies and regulatory factors has already made an impact on custodians, broker-dealers, asset managers and tech vendors. It hasn’t fully affected the compensation collected from clients of RIAs and other advisors, though.
While advisors should keep a close watch on the trend, they shouldn’t let it sway them from making adjustments to their fee structures, says MacPhee, a CFP who sold her practice in 2006. She counsels advisors not to feel compelled to provide or keep discounts in place while remembering the value of their services.
Favoring the use of the word “adjust” over phrases like “increase” and “raise” since it implies there is a reason behind the change, MacPhee instructs advisors to practice the conversations in advance, be ready for some pushback — and not to relent even if clients decide to leave the practice.
“You reach this watershed moment in your life where you say, ‘I really do need to raise my fees,’ and you’re sick to your stomach,” MacPhee said to laughter from an audience of around 75 fee-only advisors. “I know it’s gut wrenching — I truly know that — but we’re going to go back to the fact that a decision to raise fees is attached to the value you’re delivering for the client.”
One advisor in the audience echoed MacPhee’s advice about persisting even if clients threaten or follow through on taking their business elsewhere. Following the fee hike, about 100 opted not to pay the higher rate, but 80 new clients picked up the slack and joined in their wake, the advisor said.
Advisors should keep in mind that the market sets the fee and they are deciding how best to calculate it, said Will Kaplan of West Linn, Oregon-based Halcyon Financial Planning. The wide variance of fee structures in the RIA space also means that there is no perfect one and they need tweaking, he says.
“A lot of this works because of the massive disparity in the supply and demand curve for what we’re providing,” Kaplan said. “We have tremendous power in this conversation because there is nowhere else to go. And if you’re not charging what’s fair, that’s problematic on both sides.”
Still, breaking the news to clients is tough, according to Marie DeCaprio of Clifton, New Jersey-based Sax Wealth Advisors. Her firm uses the traditional AUM-based fees, but the advisors have procrastinated on enforcing a minimum fee to be paid by each client, she says.
“You’re still providing the same value, so how do you get paid appropriately for your value?” DeCaprio says. “It’s generally hard because advisors want to be helpful. It’s in our nature.”
Advisors should also not underestimate the effect of inertia in retaining clients with higher fees, or the fact that many tasks that come easily to them could never be handled by clients, MacPhee says. Her principles hold true whether advisors use some kind of a flat fee or other forms of compensation, she adds.
However, they can remind clients that they’re free to change practices if they so desire, MacPhee says. She recommends that advisors give clients a recap of their successful outcomes, describe the new fee structure and then pivot to a few compelling points on how they can fulfill the client’s future needs.
“Start practicing what you’re going to say so that the first time you say it isn’t with the client,” MacPhee says. “I will tell you that you’re going to stumble out of nervousness, so at least try to do a dry run two or three times before you actually hold these conversations.”