What to Charge for What You Do

by | Apr 25, 2011 | Business Owners, Fee Only Financial Planning, Healthy Money Relationships, Weekly Column

According to Warren Buffet, “Price is what you pay, value is what you get.”

It might be more accurate to say, “Value is what you believe you get.” Price can be a fixed amount, but value is a matter of perception.

In the middle of a stock market crash, then, does the value of financial advice go up or down?

An April 3 article by Andrew Osterland in Investment News discussed a recent survey of financial adviser’s fees. Researchers found that in the middle of the stock market crash, 33% of advisers surveyed actually raised their fees.

The article didn’t explain the rationale for advisers who increased fees while client’s investment accounts were falling. Yet, whatever their reasons, the advisers who raised their fees opened 25% more new accounts than the advisers who lowered their fees.

It seems counterintuitive that raising your fees in the middle of a financial crisis would bring in clients rather than discourage them. The increased business that came with higher fees may have to do with clients’ perception of value.

We all develop heuristics, or mental shortcuts, in order to streamline the brain’s functions. For example, you may purchase a tube of toothpaste just because you recognize it as a type you have used before. That is your brain’s way of helping you make a decision without going through the process of evaluating every single tube on the shelf, comparing ingredients, features, and prices in order to make the best decision possible.

The heuristic highlighted in the study of advisor fees is that price is a reflection of value. The brain assumes that if some professionals are charging higher prices for services than their competitors are, then they must be providing superior service. As with most heuristics, this might sometimes be true. In other cases, however, the higher-priced advisers may in fact be offering identical services for different prices.

The Investment News article mentioned the possibility that some advisors who lowered their fees during the crash did so out of guilt because clients’ investments had lost so much value during the crash.

Another explanation might be simply that one compensation model for financial planners uses the size of clients’ portfolios, or “assets under management,” as one factor in setting fees. For such planners, if clients’ portfolios shrank significantly, fees would be adjusted accordingly.

For any professionals, deciding how much to charge for their work can be complex. While it’s helpful to find other professionals that do what you do and mimic their compensation models, it isn’t always easy to find comparable businesses to measure against. I wrestle with this continually. As one of the few true fee-only financial planning firms in a multi-state region, we also specialize in asset protection, financial therapy, and real estate, which gives us basically no one to compare to.

The biggest complicating factor in setting fees, however, may be the professional’s own perceptions. It’s not simply what you believe your services are worth, but what you think others in your profession believe such services are worth, and what you think clients and potential clients will believe your services are worth.

It only gets more complex when you add in a few money scripts, such as, “The only way to make money is to charge less than the competition,” or, “Higher rates equal higher quality,” or, “I love what I do, so I don’t need to make money at it.”

As with so many other financial issues, setting fees isn’t just about the money. Deciding on the price you ask clients to pay depends on your own perception of the value you give them.

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