The financial advisor business model is the idea of charging clients directly for your financial advice and services. This should be clearly explained and emphasized at the beginning of your relationship with new clients. After all, if you are not comfortable or transparent when talking about the money you are charging, how can they trust that you will be comfortable and transparent when dealing with their money? If you are just starting out or re-evaluating your current fee schedule, this blog will help you understand the importance of your own value and the market rate for financial advisor fees. We will also discuss the factors that financial advisors should consider when setting fees, including clients’ financial goals, their ability to pay, and the value they provide.
Understanding Your Value as a Financial Advisor
Putting a number or value on your own knowledge and services can be difficult, but it is necessary as a successful financial advisor. The advice you give is valuable, but that unfortunately won’t pay your bills. Knowing your value as a financial advisor will allow you to build your own financial success while building the financial success of your clients.
The value of a financial advisor in the eyes of a client is not just the financial management that you provide, but it also includes the coaching and customized plan for wealth and tax purposes. Your clients build more wealth over time as well as build confidence in their own abilities to save for the future. Because of how important you as a financial advisor are to all of your clients’ financial successes. You must set fees based on the value you provide.
Different Types of Financial Advisor Fees
There are different types of financial advisor fees with their own benefits and drawbacks. Before you decide which fee schedule is right for you, make sure to consider all of your options:
Hourly rate
Financial advisors that choose an hourly rate only charge the client for the time they spend together. The client can come to the financial advisor to check in about retirement savings strategies or talk about saving for college or a house. Rather than continuously managing clients’ money, the financial advisor will create a plan within the allotted reserved time for the client to carry out on their own. There is often no continued oversight from the financial advisor; the responsibility to carry out the plan is on the client. Financial planners who charge an hourly fee will charge at least $100 an hour, with many charging hundreds of dollars an hour. This is a great option for a financial advisor who enjoys meeting with people more than the behind-the-scenes work.
Asset-based fee
Financial advisors may charge a percentage based on how much money their client invests. The average Asset Under Management (AUM) fee is about 1%, but this number is higher for those investing less money and lower for those investing more money. This fee schedule is
generally the most expensive for clients, but it serves as an incentive for the financial advisor to
manage the portfolio well so that both the client and the financial advisor benefit. This fee schedule is well-suited for a financial advisor who is interested in offering investment management only with no planning.
Performance-based/Commission-based fee
Financial advisors who chose a commission-based fee schedule make money when their clients buy certain investment products. Depending on the product and the investment that’s made, a financial advisor can make anywhere from 1-10% of the sale. This fee schedule is good for financial advisors who are interested in investment management only. However, it is important to note that a common criticism of this fee schedule is that it incentivizes the financial advisor to sell products based on the commission they would make rather than consider client goals.
Flat fee
Financial advisors can opt for a flat fee for their services. Typically, a client will pay between $1,000-$3,000 for a comprehensive personalized financial plan. Then, like the hourly rate fee schedule, the client is responsible for carrying out the plan. This fee schedule is ideal for financial planners who prefer to create financial plans and not deal with continuous investment management.
How To Communicate Your Fees to Clients
Being upfront with your clients ensures you will be paid. However, what is even more important is that it ensures a transparent relationship with your clients. Money can often be a taboo subject, but as previously mentioned, being comfortable when talking about your fees shows that you are not afraid to get into the nitty gritty of finances. If you aren’t sure how to approach the discussion of fees with your clients, here are some things to keep in mind
- Give them all of their options: Make sure to present all of the options your clients have as well as the value they receive for the cost. Let the client decide which one is right for them, and don’t assume they want the cheapest option. Additionally, be very specific about what you offer and what the cost is. No wishy-washy responses!
- Tell your clients before they have to ask: If you wait for the client to ask about fees rather than telling them yourself, it feels a little shady. It may send a message to the client that you have something to hide, or that you are trying to get them to agree to a price higher than they expect.
- Meet your clients at their level: Make sure that your explanation is at the knowledge level of your clients. You want to ensure your clients have a complete understanding of your fees and services before making a decision. Some clients may understand more minute details than others; either way, cater each conversation about fees to each individual client. Ask them follow-up questions to double-check that they are leaving your office feeling confident and up-to-date.
- Check-in about fees regularly: Talking about fees is usually not a one-time discussion. Keep your clients in the loop with what fees they are paying on a regular basis, not just when your fees increase.
Factors to Consider When Charging Clients
When deciding what to charge your clients, there are a handful of factors to consider. Blindly setting a number could be a disservice to you as well as your clients.
First, think about what services you want to provide. Certain fee schedules suit different services. For example, a flat rate fee schedule would work for a financial advisor who wants to make plans without offering wealth management, while an AUM fee would work for a financial advisor looking to offer investment management only. Once you decide what you want to do, then you can choose a fee schedule that works for you and subsequently set a price.
Then, consider what you are worth. Charging $200 an hour sounds like a lot, but your clients can make thousands of dollars in the process. The return on their investment (your services) can be significant, so charge accordingly.
Lastly, consider your target clients; what are their goals and what are they able to pay? If you aren’t looking to work specifically with wealthy clients, you don’t want to set your fees too high that the average person can’t afford them. There is nothing wrong with making a profit on your services, but make sure they are realistic for both you and your clientele.
Common Challenges and Solutions
Setting and enforcing fees does not come without challenges. Here are three of the most common challenges and how to solve them:
- Resistance to paying high fees: Some clients may be initially put off by high fees. To combat this, be honest with your clients about what their money is going toward and what they will get out of it. Your high fees may get them even more money in the long run, and it is important for them to consider the value of the fees.
- Balancing the value provided with the fees charged: As previously mentioned, make sure you don’t sell yourself short. Conversely, don’t overcharge your clients. If you aren’t sure if the number you have in mind is accurate, consider your experience, your knowledge, and what you offer to your clients. If there are other financial advisors that you feel comfortable talking to, you can ask them if they think your fee schedule is fair or even ask them what they charge.
- Addressing clients’ concerns about fees: Clients’ concerns about fees will always arise, but the best way to handle the situation is by staying calm and staying consistent. You don’t need to bargain your fees lower, but you also don’t need to get defensive about what you are charging. You can be sympathetic toward your client and their needs without compromising your own worth. If a client starts questioning you on how you set your fees, you can explain what factors go into setting fees, such as experience, knowledge, and overall value.
Overall, there are various types of financial advisor fees, including hourly rates, asset-based fees, performance-based fees, and flat fees. Choosing the right fee structure depends on the services you provide and your clients’ needs. The most important thing to keep in mind is the value of your work, and the rest will follow suit.
Want more advice on how to be a successful financial advisor? Make sure to keep up with our EWS Knowledge Center where we regularly post industry updates and tips.
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