Charging Fees

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, right? 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 try to do early on in your process around charging fees, where you might not have the level of confidence to put something like ranges. And so we'll, we'll talk about that here today in our time.

So the first thing that I wanna talk about is the calculation around the ease of check writing ability. So the way that we look at this is pretty simple, what we want to look at is the average household income of your typical client, okay. 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 is an easy number. And what we look to apply to that is a percentage of 1 - 1.5%. This range of 1 - 1.5% has something that we have deployed and help 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. Right? 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, right? Well, 1% of that is $3,000, right 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 fee is, Hey, I've calculated fees. And, and we're actually charging fees. And, and they see that as a real win and a home run because maybe they haven't done this before. And so it's kind of 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, you know, people are going out to a marketplace again, let's go back to saying $300,000 household income, right? 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, right, 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, how much value can it be if you're gonna charge me 500 bucks to review all of my finances, right? And put a plan together and kind of 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, you know, how can you be doing that? Charging me $500 or $750. And so, you know, there's gotta be other things that are gonna 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 unto itself. And if ultimately the client long-term or through the delivery of this, 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 in 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 being controlled 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 right 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. Okay. 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, right? 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, right? 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, right. To a client that's $300,000 household income. Okay. So three grand to 4,500, if they're charging five grand or six grand, 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, right? The validation of why the clients need this, they're buying all of those things. Cause you can win some of these upside and ratcheting up and pushing up your fees.

However, why would you want to create that? You know, that situation where they might have to think about it and they might be challenging it, we have found that 1 - 1.5%, 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, you know, how'd you arrive at my fee? What I want to tell them, I don't want to relate it back. The one-to-one to 5% is your business strategy. This is internally in your business, the way you ought to think about your business. Right? 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, right. 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 as saying, listen, what we have determined in our business in order for us to do our best work for me, my team, right? 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, you know, 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've 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, when you're, you know, thinking about now, applying this here today in your business, the thing I want you to think about is while 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, you know, 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 in 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 taught, you know, 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, right? 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? Okay, this is meeting time, right? This is review time internally. This is gathering documents. So, so meetings, right 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, that final deliverable comprised and being in a position to present that to the client. Okay. So I want you to look at the people, hours that into each and every one of those steps. Okay. So here's what you need to do.

Secondly, is now related to the people, what are the hourly wages of these people? Okay. So if, if you're looking at yourself as the advisor, you might say, Hey, you know, my hourly wages, you know, $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, you know, three or four hours of meeting time across the process with clients. It might be, you know, an hour of reviewing the plan. If your team's putting together the plan, maybe you're, 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, you know, I get into lots of conversations with people say, well, you know, does that really matter? Because we're gonna, you know, we're going to go and implement, all kinds of things, you know, we're going to gather assets, right? 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 of this away. Well, I will tell you to, to really think about that because when you look at an inn for example, right, if you ever went and stayed at a nice bed and breakfast, a beautiful inn someplace, the thing I will tell you is you wake up in the morning, you might have a continental breakfast waiting for you, right?

You might actually have a newspaper, right? 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, right? 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 end, right? They factor in the experience they want you to have into the fee that you're actually paying and do the same thing as it relates to your business. Okay. 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, right? 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, you know, we have teams that are creating no product, right? That's a lower end product for a much higher quality clientele. So you've got a clientele, that's a million dollar in household income, but you know, they're putting together a $3,000 plan in the business. Okay. 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 max 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 kind of create the experience and build and create your deliverable and spend the time with the client.

And, and you're doing this for a client that's household income is 300 grand, okay. $10,000 plan, right? And, 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 know don't need to be doing? Can we streamline our process and our business and our operations to do this more efficiently? So, you know, that we might be able to get in a bigger, a stronger balance in alignment here. Now I see very few that have this perfect alignment and, and a lot of times it comes down to the fact that we're seeing clients that, uh, 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, cause it's a good round number, you know, there's $300,000 household incomes that have a tremendous amount of complexity just because of how they've invested and all the different asset classes that they're involved in, right. Versus a $300,000 household income that's actually got a very simple situation. So complexity, you know, onto the client and to their situation can absolutely challenge fees.

So again, let me just kind of wrap before we move to kind of the whole concept around ranges and where ranges can come into play later on. But first and foremost, you know, is looking at your average household income, you know, 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, 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, okay.

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's there a good time to do this again, I would say when you've charged a, you know, 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, you know, 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, and kind of how you think about charging fees. So that's a, a really important characteristics 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, right? And then you can directly align how much time it's going to take you and your team specifically, based upon this prospect situation. And then you can engage really directly about based upon their situation, the complexities, or the simplicity, how this is 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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