Your IndustryJun 19 2014

Breaking price increases gently

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The financial advice industry is different. Pricing is more transparent, as clients see what they are paying in fees and commissions. The trend is for the consumer to understand what they are paying, receiving and that they are not overpaying .

Furthermore, your product or service is not unique. Investors can buy similar or the exact same product from several competitors on the high street. The ability to trade online almost for free has forced advisers to offer aggressive discounting to win business.

What about the issue of performance? Would clients not willingly pay more to get a better return? Over time, many mutual funds and managers underperform their benchmark because their performance must cover costs to stay even and ETFs become an attractive alternative. Manager performance tends to revert to the mean over time, unless the adviser has great money managers available.

As an experienced adviser you have a great advantage: your personal relationship with clients. You understand their a­spirations and the challenges making each situation unique. You have also helped them through difficult markets, advising them not to sell when things looked bleak and encouraging them to invest as the economy improved. You have proved yourself, which has great value.

Many advisers discounted fees and commissions during the difficult years to share the client’s pain, while others discounted to win the business. Advisers prov­ed themselves, yet the discounts remained. Well, you can raise prices by removing discounts.

No client wants a price inc­rease, but they will accept one if they understand the rationale or gain a benefit they value. The rationale must first make sense and there are particular reasons why client pricing ought to inc­rease.

Many businesses announce increases in small print, which few clients read. Then one day these clients open their bill and are presented with the increased prices. These businesses often get away with this because there are few alternative providers and changing firms can be tedious. But never forget that your clients can easily vote with their feet, so tread carefully.

However, there are ways to communicate with your client about price increases that will diffuse any potential animosity.

Damage limitation

Once you have sent your clients a letter informing them about price increases, they will not be happy and it is likely that they will immediately telephone you.

First of all, keep your cool with irate clients and present a rational case for the increases. If after this they are still angry and make it clear that they do not want to pay more, then you simply have to draw a line in the sand.

You will need to discuss any discounts they already have and explain that discount reduction will apply to new assets added to the account. However, assets they bring in before then will be priced under the old structure. Let them know that the policy will take effect in three months.

If they use professional money management, it is likely that fees are tiered with breakpoints. In discussing the removal of discounting, also talk about the benefit of adding assets to cross a breakpoint and pay lower fees across the entire amount.

You could always bundle. And why not — airlines do. They sell food instead of serving everyone a meal they might not want. Thus you might provide a basic financial plan as part of the relationship. Are a client’s needs complicated? If so, the basic plan might not be the best, but a more in-depth one, for an additional cost, may be better.

You also need to advise yourself. Will your firm certify you to implement a specific investment strategy on a discretionary basis for your client? If so, there are several investment strategies using ETFs in a fee-based account structure.

You might become the money manager, earning a larger percentage of the fee the client is paying because a money manager is no longer involved. But be aware that by eliminating the middleman, you have taken on additional responsibility and liability. Clients must also understand they are authorising discretionary trading and sign the appropriate paperwork.

It is likely your client pays fees on some assets, but not others. Treasuries might be held at no cost for years. You advise on the entire portfolio. They are benefiting from advice covering many securities, yet paying a fee on a smaller portion of their assets. What percentage are they paying overall? Probably not much.

Costs go up, but clients should understand. The financial advice industry is unique because of transparency and alternatives. Thus establishing a rationale, letting the client know ahead of time and calmly addressing concerns should make the pill easier to swallow.

Bryce Sanders is president of Perceptive Business Solutions, a US financial services consultancy

Five reasons for client pricing increase

■ One approach could be to say that you discounted when the market declined by 50 per cent. It has now recovered and it is time to return to the firm’s published price schedule.

■ When the client pays a fee, the adviser and the firm each get a portion. The client might assume the discount is shared. If the firm requires that they receive a certain amount, the majority of the discount may come from the adviser’s earned portion of the fee. The adviser earns almost nothing. Good clients will not want that.

■ Your client might assume that the firm provides everything you need to do business. They might not understand that you run a business under the umbrella of the firm. If you add new computer equipment, a better client contact system and hire an additional assistant, those are your costs. Your goal is to provide a superior client experience. Because the client benefits directly, it is logical that the costs be passed along.

■ You have not stopped learning. In your own time and at your own cost, you have earned additional professional certification. This has value. Experts with advanced credentials command higher fees.

■ The market is often cyclical. You have helped clients through difficult situations before. This is not the first time you have seen a sluggish recovery. Your earned experience has value.

Eight steps to successfully communicating with clients

Step One: Start with a personalised letter. A letter is tangible, while an email can be overlooked and phone conversations forgotten.

Step Two: Give lots of advance notice. If they are really unhappy, you have given them time to shop around, which they will see as fair.

Step Three: Clearly summarise your rationale. Are discounts going away because you are returning to the norm of the firm’s published price list? Have you invested in your business to provide better service?

Step Four: Highlight your relationship. How long have you been together? What have you done for them? What worked out well? They are an important client. This is why a personal letter is so important.

Step Five: Stage your increases. Removing discounts all at once is like a cold shower. Gradually remove a portion of the discount every six months until you arrive at the appropriate pricing level.

Step Six: Remind them. Clients forget, so add gentle reminders into future letters or emails, removing the element of surprise.

Step Seven: Ask clients to call you. You do not want a client to bottle up their anger and vow to leave. Encourage them to call with questions. Plan to review your rationale. Expect some negotiation. Every client’s situation is not the same.

Step Eight: Spell it out. Will the client benefit because of your additional outlay on technology, staff or continuing education? How? Explain it clearly.