Pricing is one of the largest levers a practice has to influence not only profitability, but also their capacity for growth, and yet it remains one of the most elusive elements to master. Adding to the complexity is Standard 7 of the FASEA Code of Ethics that states “…you must satisfy yourself that any fees and charges that the client must pay are fair and reasonable and represent value for money”. In the current environment, where advice firms have little or no ‘passive revenue’ anymore, and where clients must explicitly renew their services each year, getting your pricing right could be the difference between business success or failure.
BT recently engaged Elixir Consulting to deliver a webinar and share their top tips with advisers on how to master their pricing. Consultants Lana Clark and Monique le Roux share a summary of these tips here.
When designing a pricing model to be fit for purpose and fit for the future, there are a number of elements to consider. There is no single answer to what is the ‘right’ or ‘best’ pricing model that an advice firm can implement other than to say it should be one that is well-designed to suit the client base, value proposition, cost base and vision of the business owners and applied in a way so that every client is profitable. If a client is not profitable, there should be a conscious decision about their retention, and the overall revenue must be well managed so as to remain sustainable. Beyond that, whether you use a fixed, asset-based or hybrid model, how you structure the timing of your fee collection, how much you charge and how you calculate the fee for each client could vary from one firm to the next.
The most successful pricing models are created after considering the elements of the business that are intrinsically linked to pricing, and on the future vision of the business. Take a close look at the following areas before you even start with pricing:
When it comes to building a pricing model, Elixir recommends that you start by understanding the costs to deliver your services in order to determine your Minimum Recoverable Amount (MRA) and build from there.
The first step is determining charge-out rates for each role in your business. The charge-out rate for different team members should vary as skills, expertise, education and value delivered to clients will vary from role to role. At the very least, you may want a different rate for advisers and admin support, potentially paraplanning (if you in-source), associate adviser, senior adviser etc.
One of the fundamentals of efficient practice management is aligning the right people to the right role, completing the right task and this can be key to determining accurate pricing to ensure your clients aren’t paying unnecessarily high fees.
Some key tips for determining charge-out rates:
|Example of chargeable work
|Client meetings, completing file notes, preparing paraplanning instructions, phone calls with clients.
|Preparing advice documents, product comparisons, cash flow/capital adequacy modelling.
|Research, insurance quotes, 3rd party follow ups, managing outstanding requirements, managing claims, phone calls with clients.
Many businesses underestimate the amount of non-chargeable time staff have in an advice business and the amount of time it takes to complete different tasks. Whilst it can vary from one client to the next, if you involve your team in the conversation, you should be able to determine the ‘typical’ time for your practice to complete tasks.
Also consider how many weeks your staff can work.
Everyone has 52 weeks in a year but consider:
These are all non-chargeable hours. For some practices, there may only be forty-four chargeable weeks in a year, and the actual time will vary between staff members.
Elixir suggests using a customisable structure that allows advisers to calculate the ‘right’ fee for each client, using a formula:
1. Minimum Recoverable Amount (MRA) – the minimum base fee (including profit margin) that covers your service to onboard a new client or provide ongoing advice and service for a ‘standard’ client of your firm.
2. Complexity - these factors might vary from one client to the next, based on their needs, where a firm provides more time, service, specialist knowledge and/or experience. They may even include a third party to support the client in some way. For example, unless a firm specialises in Self-Managed Superannuation Funds (SMSF) they are not likely to include the additional work required to advise on an SMSF in their base fee, rather it would be added where appropriate.
3. Variable factors –
a. one example of variable pricing might be in an Asset-Support premium. Some firms apply this premium to the assets they manage directly, others apply it to their client’s entire investable assets; while they may not manage it all as funds under management, they’re providing expert advice on cashflow management, structuring, debt management and they’re helping clients make decisions about all their assets regardless of whether they’re in property, business, cash, etc. An Asset-Support premium is generally between 0.2 - 0.5% on top of the fixed fees.
4. Value overlay – the value overlay is sometimes known as the ‘art’ of pricing, largely because perceived value really comes down to the individual. Clients come to an adviser seeking solutions – time is one thing, but the advisers’ intellectual property and ability to consistently coach them in making the right decisions about their money, is valued. The value overlay can be the most difficult to navigate when determining a pricing model, and when applied, is often applied as a percentage premium (e.g. 10 or 20%) to the calculated fee.
Elxir recommends developing a calculator for internal use by the firm, and the client is quoted the number that is determined (rather than the underlying components). The end result for each client must meet standard 7 by representing value for money.
Once a pricing model has been decided, here are a few tips from Elixir to set your practice up for success:
Lana best sums it up. “In the 15+ years we’ve worked with advice firms, there is rarely someone who is not challenged in some way by pricing. The important thing to remember is that a pricing model is unique to each firm. Every firm has different offerings, expenses and processes; therefore, fees are invariably fit for purpose to each firm. Pricing can be overthought, or not thought of enough, or sometimes advisers find they’re paralysed to the point of giving up – deep work is required to get it right. It’s not a project that anyone should take lightly and can sometimes take months to get the model right, let alone implement it.
Get your numbers and your process right, be consistent with pricing and follow through on your pricing project. One thing we know for sure is that those who are thorough in their design and then follow through on a pricing project, and update it regularly will reap the benefits and never look back.”
Information current as at 31 March 2023. This paper has been prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian Credit Licence 233714 (Westpac). The information contained in this publication provides an overview or summary only and should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, the Westpac Group accepts no responsibility for the accuracy or completeness of, nor does it endorse any such third party material. To the maximum extent permitted by law, we intend by this notice to exclude liability for this third party material. This communication has been prepared for use by advisers only. It must not be made available to any client and any information in it must not be communicated to any client.