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Written by Steve Bowden & Liz Pemberton, Business Strategy Consultants, AXA Wealth, July 2010 This information is directed at professional financial advisers only. It should not be distributed to, or relied upon, by retail customers Whilst the RDR proposals around adviser charging have brought the issue of “fee for service” sharply into focus for many firms, determining how to price the services delivered by a professional financial advisory business is a crucial factor influencing the future profitability, viability and ultimately the long-term embedded value of the business. Despite the current regulatory influences, there is no off-the-shelf solution to pricing. Instead the age old considerations around pricing for advice remain largely unchanged:
In approaching the challenge of determining the appropriate pricing level, the two traditional methods that can be adopted are cost led pricing or market led pricing. The former involves building a cost model that includes all the costs associated with the activity and the appropriate ‘reward’ margins that compensate principals of the business for their business risk. The latter model involves surveying the marketplace in an attempt to determine what the market will pay! Both methods are valid but in reality it is prudent to use a combination of these approaches in arriving at pricing decisions. Also by combining both methods you can allow for the final pricing model to take into account the value delivered by the business. Value based pricing Value based pricing is now becoming the more attractive model for financial services businesses who wish to overtly integrate their service components to deliver the outcomes clients value and meet future regulatory requirements. The issue of ‘transparency’ firmly puts the spotlight on the adviser to articulate and show the value the client will be receiving. However value as a concept is often misunderstood and mis-appropriated. From a pricing perspective, whilst the aesthetics of business image and relationships with clients are important, and will influence the value experienced by clients, if you accept that the externally perceived value of what you do for your clients manifests itself in an single entity: ‘the client experience’ - it is the effective delivery of service components that will mostly impact the value level. The pricing migration path To be truly effective the migration to a more appropriate pricing structure is a journey the business should undertake with clear objectives and should not be viewed as a perfunctionary regulatory task. At the same time the business is keen to have more control over their revenue levels as part of their financial strategy and embrace the direction in which the industry is moving, it should keep at the core the desire to deliver and be paid appropriately for the value it delivers to clients. To be proactive about addressing the appropriate pricing structure for the business, four key tasks must be completed in advance: 1) a strategic position must be adopted to identify the ‘ideal’ client: to whom is your business pitching its services to and why? 2) segmentation of your existing client population will help identify where the level of value and centres of influence lie within the business 3) the business must determine and be able to demonstrate its client value proposition (CVP) 4) the service components that will deliver to this proposition need to be identified It is not until the initial and ongoing service offering is established that the business can introduce the appropriate pricing structure to reflect the value in each area. Structural considerations This is a more contemporary approach of a fee for advice and service: being paid for what you do and not what you sell is the mechanism which lends the most control to the advisory business. Fees provide clarity not only for the client as they are easily understood and disclosed, but also the business in its ability to control cash flow more directly and determine revenue, profit and business value. By moving to a full fee for advice model you are effectively divorcing the link between revenue and product sales and level of investment, and building the link between client relationships, appropriate advice and revenue. This in turn means the business is better able to control its bottom line and develop solutions that are more closely linked to what the client values. If the fee is based on the advice provided, value can be placed on advice and recommendations with priorities linked to client needs or goals rather than product selection, so business can be compensated even though the client chooses not to implement. The benefits of value pricing A well structured ‘fee for service’ pricing model will commonly deliver a number of direct business benefits: Impact on business profitability and value
There is one common element amongst many advisers with setting their price – which is that it is generally the adviser not the client who has most trouble identifying the value for their services. Many undersell their expertise. Once confident with a new pricing model, there should also be a strong understanding of how the business delivers value to clients – your true client value proposition! Why should you invest the time to determine an appropriate ‘values based’ approach to pricing your services? Simple. Because you’re worth it! Steve Bowden and Liz Pemberton, business strategy consultants, AXA Wealth |
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