The importance of advice pricing
It sounds obvious to say that pricing can make or break a business, but in the case of financial advice it’s a particularly pertinent issue that remains one of the most debated and discussed across the entire adviser community.
There are several reasons for this.
Firstly, numerous studies[1] have shown the price of advice is one of the main barriers to consumers seeking financial advice in the first place, and is one of the main reasons people switch advisers, or exit the advice system altogether.
Secondly, advice – and indeed financial services generally – has a longstanding trust issue with the community at large, and perceptions about adviser remuneration is undoubtedly a key contributor here.
Thirdly, from the adviser perspective, the cost to provide advice continues to rise. With the streamlining of red tape recommended by QAR yet to yield tangible benefits to advisers, the costs of the various inputs into advice (wages, rents, PI insurance, licensee fees, ASIC fees etc) continue to rise, and advisers face a difficult choice – either pass these increases onto their clients, or reduce their own margins, potentially undermining their long-term sustainability.
Coming from the other angle, advisers must also deal with two forces that effectively limit their flexibility with regards to remuneration. One is an overall consumer reluctance to pay an amount for their advice that comes close to covering the cost of providing that advice. The other, specific to life insurance, is the LIF related upfront commission cap of 60% (which was essentially locked in by QAR).
With this in mind, this article – the first in a two-part series – will seek to go back to first principles and offer advisers a way to consider and construct a price for their services that can both ensure their business remains sustainable, while building trust and loyalty with clients and prospects. The second part in the series will explore the mechanics of ‘how’ to charge, looking at different pricing methodologies and models, as well as addressing the all-important question of how to communicate your fees.
The starting point – your philosophy on price
Your philosophy on pricing your services is arguably the most fundamental business decision you can make. That’s because unlike the perfectly competitive marketplace depicted in economics textbooks, the market for advice has a key structural imperfection – namely the gap between what most consumers are prepared to pay for advice, and the costs incurred by advisers in providing that advice.
Advice practice owners must decide whether to price their advice from the inside out, or the outside in.
Pricing from the inside out means your starting point is what it costs you to provide advice (your cost to serve). After calculating your total cost to serve you can then add your desired profit margin to arrive at the amounts you need to recover from your clients.
Pricing from the outside in means starting with your potential clients, and what they are prepared to pay. This is a truly client centric approach.
To the extent that the two perspectives will result in entirely different numbers, they will actually drive your entire business model.
The first approach is likely to take you down a traditional, labour-intensive path. Many people will be unable to afford your advice, but the limited supply of advice (courtesy of shrinking adviser numbers) means there will be enough of a market to make your business sustainable. Under this approach you are probably deciding to prioritise a high touch approach to client care, which many will love.
The second approach will require you to build a business model that strips the cost of advice to the bone. This could require a more mass produced, low touch, modular approach to advice, which relies heavily on technology, virtual meetings, home offices, and outsourcing.
Each approach is as legitimate as the other, giving advisers equal scope to act in their client’s best interests and provide value for money, while remaining sustainable. But each approach is very, very different.
To continue reading and receive CPD points, view the original article on AdviserVoice’s website.
