Charging Fees

Here at Legacy we are strong believers in charging a fee for your advice. Now, we know not everyone is able to depending on your company, but if you have the ability to charge a fee and you’re not; or you are but not consistently; or you want more information on the right amount to charge or how to handle objections around this; you are going to want this video.

Hey, it's Todd Fithian with Legacy and in this segment I want to talk about the calculation of fees. Since the inception of our business here this has really been something that has been at the forefront of our thinking and really a lot of the work that we've done in helping advisors transition from never charging fees into their business or working with advisors that have charged fees but really with no strategy or focus around whether this is right or wrong, the prices are right or wrong and if it's the right value for my business. And so, today we want to talk about three things with you.

Number one is we want to talk about what we call ease of check writing ability. And this is the calculation that will help you to figure out and we'll give you a structure around for, how to think about what you should be charging for the types of clients and prospects that you're meeting and interacting with, that's number one.

Number two is a calculation that we call the time value of money and this is one that we find financial advisors often don't think about and we think it's really important because what the time value of money is, is looking at what does it actually take and require for you, your team to actually deliver the value and create the end product, the widget to deliver to that client? Looking at the business, what is this costing the business? And so we'll talk about that here today.

The third thing that we'll talk about is ranges and ranges can present all kinds of challenges when not really well thought through and tried to do early on in your process around charging fees where you might not have the level of confidence to put something like ranges so we'll talk about that here today in our time.

So, the first thing that I want to talk about is the calculation around the ease of check writing ability. So, the way that we look at this as pretty simple. What we want to look at is the average household income of your typical client. So let's just use for argument's sake today a couple or a household income whether it's an individual or a couple that is $300,000 because $300,000's an easy number and what we look to apply to that is a percentage of one to one and a half percent. This range of one and one and a half percent has something that we have deployed and helped advisory firms around the world deploy in their businesses very successfully. We call it the ease of check writing ability because this number calculates inside of that family based upon their household income, a number that they actually have liquid, a number that they should have access to in checking, savings without having to go through the process of liquidating something to actually be able to engage your service or to maybe decide not to buy something new that they wanted to do or maybe take a family vacation.

We don't want to have them in a position where they have to feel like they're losing to win. We want this to really feel like a win win all the way through and so this is really what this calculation allows you to do. So if you do the simple math and you think about a household income of $300,000 well 1% of that is $3,000 up to one and a half percent that's $4,500. So anywhere in that range, $3,000 to $4,500 you can really feel secure that that is going to be in alignment with their ability to be able to engage in that service to write a check because they have that level of liquidity available to them.

Now we want to look at this because we have seen situations where clients of ours have gone through our training, have participated in courses with us and they've gone out to their marketplace and they've gone in and charge fees, "Hey, I've calculated fees and we're actually charging fees." And they see that as a real win and a home run because maybe they haven't done this before and so it's a first thing. People get excited, things of that nature but then they start to run into challenges.

And what we've seen is when we analyze that we look at some situations where people are going out to a marketplace, again let's go back to saying $300,000 household income and they're charging a $500 fee or a $750 fee. So what's the problem with that? The challenge with that is people that are making $300,000 are smart people, they're successful people, and they are going to be able to look and assess things in a way that they might attribute, "Well, how much value can it be if you're going to charge me $500 to review all of my finances and put a plan together and help us figure out the future?" Well that can present challenges so being too low on the low side can cause people to step back and say, "Well, how good can this be?"

The other thought that it might put in people's mind is, "Well listen if you're running a successful business as a financial advisor how can you be doing that charging me $500 or $750? And so, there's got to be other things that are going to come down the pipe where you're going to be charging me or trying to sell me things."

We want to take that anxiety completely out of the relationship. We want this fee to be viewed as a standalone engagement, as a value into itself. And if ultimately the client longterm or through the delivery of this first phase of the process would like us to help them to implement all the products and services and resources that we can well then we want that opportunity as well. But we really want to separate these things and I can't express this enough especially in the world that we're all living today with regulation and things of this nature this is an approach and a model that allows that client to connect on an advice based relationship first and foremost and then be in control to make the decisions to actually engage you to help implement as well.

The thing I will tell you, and I've been doing this a long time, we've been doing this at Legacy a long, long time, is that when you use our process around discovery and incorporating that with your plan, really delivering advice, not just planning like the rest of the world is delivering you are creating an engagement, and an experience, and a relationship and a level of trust with that client. That you are ultimately going to get the opportunity I would say in the high 90% to help them actually implement and execute with your competencies around your recommendations. So rest assured that is what we are seeing on a very consistent basis.

However, you don't want to be too low because people will question its value and people will question, "Well, what else is going to be coming at me later in this relationship?" We want to take that off the table. Same thing on the upside we see people that are going out to the marketplace, "It's not working, I'm excited we're delivering a lot of value but they're charging $5,000 or $6,000 to a client that's a $300,000 household income." So, $3,000 to $4,500, if they're charging $5,000 or $6,000 because that's what they think they're worth they're outside of that comfort level. So, their sales approach better be really, really good. The validation of why the clients need this, they're buy in, all of those things because you can win some of these upside and ratcheting up and pushing up your fees however why would you want to create that situation where they might have to think about it and they might be challenging it?

We have found that one to one and a half percent and I would tell you even starting out focus around that 1% and listen if a client or prospective client in the sales approach comes back and says, "Well, how'd you arrive at my fee?" What would I want to tell them, I don't want to relate it back. The one to one and a half percent is your business strategy this is internally in your business the way you ought to think about your business. But I don't necessarily want to say, "Well this is 1% of your household income or one and a half percent of your household income," because that can feel like a penalty and that can feel like you're just lumping me into a box with everybody else and I don't want them to feel that way.

What I would want you to respond back or what I would respond back to that question if I were you, is saying, "Listen, what we have determined in our business in order for us to do our best work for me, my team," talk about the resources you have, "Is in order for us to be able to deliver on the value and create a great experience around that for our clients this fee correlates with the amount of time that it takes us to actually enter into that engagement and deliver a significant result in value for our clients. So, that's simply the time that it takes us to do that work. This is not a big profit center for our business but it allows us to be in an engagement with clients where we are being paid for our time to deliver that value and product for our clients so that they can make the decisions that they need to make about their financial future."

That is a much different response to, "Well, we're charging this as a percentage of your household income or we're doing this as a percentage of your net worth." Which I'm sure you've seen speakers, you have attended programs where people are pricing their fees in that way. What I tell most of my clients, at least in the way that the business works today, is that the fees are more about what it does to the relationship, the fees that you gather and gain from a client it's more about how that relationship behaves when they have paid you a fee than it is actually about the fee revenue for your business. However, over time if you're incorporating fees the way that we believe you should which is reoccurring fees for advice year after year after year these can become significant revenue streams for your business. So, think about it on those terms and think about that average client.

So, when you're thinking about now applying this here today in your business the thing I want you to think about is well you have some clients that are $150,000 in household income and maybe you have some that are $750 or a million, maybe the range is all over the place. If you've never charged fees before the thing I want to, the advice I want to give you is to take it slow, to enter into this on a model where you can be successful. And what I would say is take the average, look at 10 of your clients and their household income and come up with what that average number is.

And so therefore, sometimes you're going to be on the low side, sometimes you might be on the high side a little bit but you should be in a good ballpark frame where the first half a dozen at least that you do and the engagements that you make that you can actually make that engagement with confidence. You know your number going into it, you know what you're going to charge and so you've already got that number in your head. And I want you to really think about that at least for the first half dozen, I would argue in many cases a dozen times to get the language, the process down and just be in a good space on that so think about that.

So, the second thing that we've talked about here is really this time value of money calculation. This is really, really important as you think about what you're building and you think about your entity as a business and being a business owner to that entity. We have this conversation all the time with our advisors because in this business we're not business 101 and business 201 as it relates to running and building a financial advisory practice it doesn't happen. But this is one of the ways in which you can actually do that and really be in alignment knowing that you're going in the right direction.

And so, the time value of money is a calculation that simply works this way. What we want you to do is to look at your business, look at your widget, the deliverable that you're actually creating on behalf of your client as a part of this engagement. And what I want you to look at is how much time does it actually take you to put that together, this is meeting time, this is review time internally, this is gathering documents. So, meetings internally, meetings with the client, gathering documentation, creating the plan. It's all of those things that you need to do to be in a position to actually have that final deliverable comprised and being in a position to present that to the client.

So, I want you to look at the people hours that go into each and every one of those steps. So here's what you need to do secondly is now related to the people. What are the hourly wages of these people? So, if you're looking at yourself as the advisor you might say, "Hey my hourly wage is $400 or $300," whatever that number is. What's the value that you put on your time and then how many hours are you actually putting into this? It might be three or four hours of meeting time across the process with clients, it might be an hour of reviewing the plan. If your team's putting together the plan maybe you're spending an hour or two reviewing it or helping strategize around the recommendations, things of that nature. And then you have to look at your team. Who else on your team is interacting with this process? Scheduling meetings, sitting in meetings, creating the plan, gathering information, phone conversations with the client.

Now some of you listening to this might say that, "Well this is a bit anal," well it is and it should be. Again, if you're thinking about a business you want to know what does it actually cost us to get this thing out the door. And I get into lots of conversations where people who say, "Well does that really matter because we're going to go and implement all kinds of, we're going to gather assets, we're going to do other product worked, insurance work or whatever it might be down the road. And so, I can afford to maybe give a little this away."

Well, I will tell you to really think about that because when you look at an inn for example. If you ever went and stayed at a nice bed and breakfast, a beautiful inn some place the thing I will tell you is you wake up in the morning and you might have a continental breakfast waiting for you. You might actually have a newspaper that's sitting and waiting on your doorstep for you when you wake up in the morning or they put coffee in the room or things of that nature to create an amazing experience for you. They'll bring up endless amounts of towels and things if you need them for your bathroom. Well, do you think that any of those costs are not factored into the overall stay at that inn? They factor in the experience they want you to have into the fee that you're actually paying and you need to do the same thing as it relates to your business.

So look at that calculation, determine what that calculation is. Now, here's the second thing and this is where the time value of money and then the ease of check writing ability come together. I want you to look at these two numbers and see where you are. Where are they in comparison to one another? I've seen situations where we have teams that are creating a product that's a lower end product for a much higher quality clientele. So, you've got a clientele that's $1 million in household income but they're putting together a $3,000 plan in the business and so that's a mismatch. You probably have to look at ways in which you can enhance and dial up your deliverable for that experience and if it's already there and it's maxed out and it's the most you can do and it's working well then good on you that's a super profitable deliverable.

The thing that we get concerned about is where people are creating a really expensive deliverable for a very low end client. So in situations where, and we've seen this a lot, where it costs your business $6,000, $7,000 $10,000 to create the experience and build and create your deliverable and spend the time with the client and you're doing this for a client that's household income is $300,000. $10,000 plan and advice around the plan for a client that's $300,000 household income, you need to think about that because that is a great misalignment. Are we doing overkill? Are we running things in iterations of things that we don't need to be doing? Can we streamline our process and our business and our operations to do this more efficiently so that we might be able to get in a bigger, a stronger balance and alignment here. Now, I see very few that have this perfect alignment and a lot of times it comes down to the fact that we're seeing clients that there's a range of their household income.

The other side of it is listen there's no doubt that again just simply using the $300,000 household income because it's a good round number, there's $300,000 household incomes that have a tremendous amount of complexity just because of how they've invested in all the different asset classes that they're involved in. Versus a $300,000 household income client that's actually got a very simple situation so complexity onto the client and to their situation can absolutely challenge fees. So again, let me just wrap before we move to the whole concept around ranges and where ranges can come into play later on. But first and foremost is looking at your average household income, come up with that fee, average it out over your first half a dozen I would argue you'd be smart to do it for your first dozen engagements. Get clear, get your language dialed in and be tied on that.

Second thing is, is that look at that time value of money calculation what's the alignment between the types of clients that you're doing engagements with and what it takes for you to create that widget and that experience around the widget for your business and getting it out the door. This is just a smart business owner thing to do and you should absolutely be doing this. And then we talked about the challenge of complexity, different clients that have the same household income can have different levels of complexity and that gets us into ranges.

As you start to get more sophisticated, more comfortable, more confident, actually showing much greater levels of success in your business, you can start to build ranges. So, and we have a number of clients that actually engage around ranges. So, it gives you the opportunity to get a better understanding, a better look into the client situation so that your fee is much more aligned around the complexity. Now, when is there a good time to do this? Again I would say when you've charged a number of fees where you know that your confidence, your success rate is really, really high, I mean that's obviously a good time. When the conversion of the fee engagements that you're taking on is moving into where you're actually implementing your core products and competencies and services for that client and you are moving closer to the center of that client's life, relationally it's happening in moving the way that you want it to. And those are the things that I would look for. So you're actually having success in building this into your business and then you can start to see.

The last thing actually I want to say about that is when people are actually being introduced to you and showing up better prepared knowing that you charge fees and how you think about charging fees. So that's a really important characteristic of the conversations become easier because people are showing up prepared to engage the way that you engage and so those conversations go much easier. And then you can get to a point where you can just have ranges of fees. And so, the range of the fee is really simple because it is about complexity and so you look at the time value of money and then you can directly align how much time it's going to take you and your team specifically based upon prospect situation. And then you can engage really directly about based upon their situation the complexities or the simplicity how much this is going to take you and your team to be able to deliver that value and that core product.

So, we have shared a lot here for you to think about as it relates to fees. I hope that you've found this really, really helpful and we look forward to seeing your success and having many, many engaging conversations about how to help you successfully incorporate fees into your business because we believe it to be the future. Thank you.

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