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Forward Thinking Magazine : April 2011
45 “One positive of this fee structure is the planner’s income does not rise and fall with markets, which makes it easier to forecast revenue and budget,” says Fiona Mackenzie, Senior Practice Consultant, Macquarie Practice Consulting. “This approach to fees is also simple to explain to clients – they can see a dollar fee and budget for that. Fees can often be better linked to the actual services provided to the client and are not affected by the size of the client’s portfolio, whether the portfolio is on or off platform, or the type of assets in which the client invests,” explains Mackenzie. “This fee structure can A core initial consideration is whether you plan to apply the new pricing structure only to new clients, or to both new and existing clients be suitable for clients with smaller assets but real needs, for example accumulator clients needing good structures set up and guidance over time on saving and investing. It can also be attractive to accountants who refer clients to planners because it is similar to their own pricing regimes.” But advisers also need to recognise they can miss out on the upside when markets rise. And when markets, drop clients may baulk at paying the same fee as they do when markets are buoyant. Another drawback is that if the fee scale is linked to the size of portfolio, there will be steps between different bands. This can create large increases in fees. Making the transition from an asset-based percentage model to a fixed fee can also be tricky, especially while portfolio values are down. Indeed, planners may not want to be locked into the lower fee levels applicable right now. Administration could also be more complex, especially if invoicing the client directly. A third option is to base fees on an hourly rate, but this is generally seen as not really appropriate for financial planning businesses, except for unusual or one-off pieces of work. It also doesn’t support long- term interactions with clients. Where do I start? If you’re reconsidering your fee structure, it can be daunting to know where to start. “A core initial consideration is whether you plan to apply the new pricing structure only to new clients, or to both new and existing clients,” Liz McCarthy says. Another central concern when reassessing your fee structure is how it links to the business’s value proposition. “You need to think about where the business is at and where you want to take it; your fee structure and your value proposition are like two sides of the same coin – they need to fit together,” says Fiona Mackenzie. The start of the fee reassessment process is to work out how much profit each client produces. “Start by taking the client’s FUM, the revenue they generate for the business, what you do for them and how much time it takes you to complete this work. Then, apply a cost to this process to work out which clients are profitable and which are not,” says McCarthy. “The idea is to understand your business, work out how you could change the fee structure for individual clients, identify unprofitable clients and readjust your pricing across the board to generate improved profits.” One example of an adviser who has successfully reassessed her pricing structure is Rosemary Salway, who owns Newcastle financial planning firm Beyond Wealth, a specialist self managed super fund advisory firm that has many clients who also require direct share trading advice and execution. Salway is moving to a fixed fee structure for clients because she wants to de-link her revenue from the performance of financial markets and she wants consistent cash flow. practice management