There’s more to ‘pricing’ than simply what you are charging for your financial planning and advice service.
When considering your overall pricing strategy, you actually need to consider three key elements:
- What are you charging?
- How do you manage your costs?; and
- How are you getting the most value out of your business?
In other words, you need to establish what your service proposition is worth to your target client and to your business.
You also need to examine how you’ve come up with your pricing model, and how the business takes care of its financial management, so things like budgeting, forecasting and cashflow.
Often we find that financial planning firms have no idea about how much it costs to run their business per hour or per day. So when they charge for services, they don’t understand what their base cost is.
If you know what it costs to keep your business open for an hour, you can work out the cost base, and from there what a fair profit margin looks like.
You then have the basis for a charge-out rate for a particular piece of work based on the expected time taken, or the basis for a fixed project fee.
One of the things we’re working on a lot with firms at the moment is helping them get a formal valuation for their business, and an understanding of what their business is worth.
While it’s an in-depth process which requires extensive data analysis, and can be quite time-consuming, it’s worth every second of the time and money spent.
Once firms understand what the value of their business is, even if they’re not looking to sell, it does provide a marker in the sand.
This acts as a starting point from which to build from, rather than a final destination.
At the moment charges are focused around the percentage-based, assets under management model. But I believe the future lies in project costing, and in fixed fees.
At the very least, firms should consider using a fee calculator to work out what the fee will be for a given piece of work.
This can be a simple spreadsheet which can be used in a client meeting. Information is pre-filled so that the client can see it, and sharing the spreadsheet or fee calculator means the client can agree to the fees and services there and then.
The advantage of this approach is if fees are on a fixed basis, they are calculated in a way the client understands. They have also seen for themselves how the fee is calculated in real time.
Another thing to consider around pricing is that it’s unlikely that fees, if worked out properly, would come out as a round figure.
A financial plan that’s costed at £1,550 looks like a number that’s been plucked out of thin air. Clients can be very sceptical if costs are presented in this way.
Pricing should be properly calculated, and it’s easy to do this by having a simple spreadsheet or cost sheet in front of you.
No one is saying you shouldn’t make a profit – in fact, quite the opposite.
But firms should also be very mindful of clients who are paying a fee that is in excess of the service they are getting. Clearly risks and liabilities have to be taken into account, but it’s not fair for clients to be paying over the odds.
Pricing and being consistent
It’s important to agree your pricing strategy across the firm, because it’s the first trigger point for consistency. For example, when administrators are expecting price changes, these are naturally connected to service changes.
If a firm has a set pricing structure for a specific task, when a client signs up the team automatically know there’s a certain service that will be delivered, because there’s a certain price that will be charged.
It will already have been pre-agreed in the team that this service costs this much, and it will be delivered in this way. It creates consistency at all levels, and means the team can just crack on, without any stopping and starting to the advice process.
This is why setting the price for something and sticking to it is so important, and why it forms the basis of a consistent proposition.
The idea of planners charging clients via monthly retainers is one that is increasingly being discussed. What financial planning firms have the opportunity to do via monthly retainers is to move into more of a programme model.
You might call it something like the ‘Financial Planning Transformation’ programme or the ‘Financial Planning Clinic’.
Having worked out your cost base and factored in the cost of any additional services, it may be that you design this as a 12-month programme that for example takes their finances 'from woe to wow'.
This programme would then come with a set fee which is charged as a monthly retainer.
If you do decide to go down the monthly retainer route, it’s worth mapping out what’s likely to occur over a given period.
It’s a great model for cashflow, and effectively means that it’s ‘fee for service’, with any implementation recommendations or separate project work charged at an additional rate.
The added benefit is not only do you create a kind of ‘membership model’, but clients have a really clear understanding of what it is they’re paying, and the services they can expect to be delivered in return.