Kitces: The 4-step strategy to raising your fees

Lately it’s been popular to talk about fee decreases and whether advisory firms are going to have to make cuts to compete with robos and new technology.

But when we look at the actual industry benchmarking studies, the median advisory fee hasn’t actually dropped at all in the past six years. And in fact, for some higher-net-worth clientele — folks with a couple million dollars — the median advisory fee is actually going up. Not a lot, but it’s moved up a little bit.

As competitive demands rise, and as we have to do more and more for our clients to justify our fees, I’m starting to see more advisory firms come back to the table with this question: “Well, if I’m doing this much more for my clients, maybe I need to actually charge a little bit more. But how do I communicate a fee increase? How do I put one through?”

THE MARKETS DECIDE
First and foremost, it’s worth recognizing that there are better and worse times to communicate a fee increase.

In general, you want to do it when markets are up, income is up, net worth is up — basically, when times are good and people are feeling good about their money.

If times are bad and the client is feeling very cash-flow–constrained, it isn’t likely to go well. Not only because most people rationally want to cut expenses when times are bad, but also because there’s a behavioral finance phenomenon called the bottom dollar effect — whereby consumers disproportionately apply blame for their financial woes to their last flexible dollar. That means that if you discuss fees when they’re feeling financially constrained, you draw not-so-positive attention to them.

For most of us, now is a pretty good time to have this conversation. Portfolios are up. Net worths are up. Income is up. Most clients are feeling at least relatively good about their financial situation — at least better than they were a number of years ago.

REINFORCE VALUE
If now is the time, the question still arises: How exactly do you break the news? I’ve actually seen a lot of advisory firms go in the exact opposite directions on this. Some just state it matter-of-factly in an email or a letter to clients:

“Dear clients, we’ve enjoyed working with you on your financial planning journey. But due to the increasing cost of doing business, we are raising our fees at the end of the year. The new fee schedule will be such and such. Thank you for your continued business. Please let us know if you have any questions.”

That’s it.

Now, other advisers I know prefer to do this in person and sit down across from the client and have that conversation:

“You know, Jim, we’ve been working together for many years now. Your portfolio is up almost 70% since we started working together and we’ve had more than 20 meetings on various planning issues. We’re still charging you the same fee that we did when you first joined the firm. Since then, we’ve expanded our investment team to better watch over your portfolio. We’ve expanded our planning team by hiring young Charlie here, the paraplanner, to help serve you better. And we’ve decided that we need to adjust our fee schedule to recognize the full breadth of value we’re now providing you. And so, beginning next year, we’re going to be adopting a new fee schedule, such and such. Do you have any new questions about the new fee structure that I can answer?"

Either way, the message is pretty much the same. There are basically four key elements:

1. Starting with the positive. “I’ve enjoyed working with you. We’ve accomplished a lot together.” Over the years, clients forget all the stuff that we do for them. I feel this all the time sitting down with some of our longstanding clients at the firm. I have to kind of remind them, “Do you realize how much stuff we’ve actually done together over the years? Do you remember where you were a couple of years ago and where you are now? We’ve come a long way.” And so there’s nothing wrong with starting out with a good reminder of that. It helps reinforce your value for what’s coming next.

2. Explain why you’re going to raise fees, because people are going to ask. Ideally, you’re adding new services or new team members to give clients more value. It could just be an acknowledgment that costs have gone up and you need to charge more to do what you do. People don’t like cost inflation, but they do understand it. Just be prepared when they want to know why. Put the best foot forward, but answer the “Why?” question.

3. State that you’re increasing fees in the future. It doesn’t have to be the distant future, but no one likes an immediate fee increase. Clients are likely to question whether you’re still valuable and decide whether they’re going to terminate you now, before the increase hits. Don’t put them on the spot. State the fee increase will be coming next quarter or in six months. Frankly, since we’re halfway through the year, I would just say, “It’s going to take effect in 2018.”

The good news is that this gives clients time to evaluate your value without pressure. Pressure can make a fee increase feel more negative. Psychologically, our brains discount future costs more dramatically. You can use behavioral finance to your benefit. A fee increase now makes clients feel as though money is out of their pocket now. A fee increase later is like, “I’ve can deal with it later.”

And you know what happens when later comes? They are still working with you. They enjoy working with you. It’s too much of a pain to fire you, because you give them good value on an ongoing basis. And they stick right through the fee increase.

4. State the new fee. Don’t beat around the bush. If it’s a new retainer fee, “The new fee is this many dollars.” If it’s a new fee schedule, “Here’s the new AUM fee schedule.”

If you act embarrassed, like you’re not comfortable with the new fee or you’re not sure if the client will accept it, they probably won’t. If you’re wavering, they’re going to press you on it.

BE CONFIDENT
If you don’t act confident in your own value, your clients aren’t likely to think you’re worth it either.The single greatest driver of a successful fee increase isn’t even about the value to the client. It’s about you. It’s about your confidence in your value. When you confidently communicate to the client that you’re worth it, and you back it up with some reasonable value that you’re providing, they tend to believe you’re worth it.

It takes a pretty drastic increase to make a happy, satisfied client so unhappy that they fire you. If you are not confident about your fee increase and your value when you suggest that maybe this fee increase won’t stick, they’re going to challenge it.

I’ve actually seen this play out with new advisers as well. When most of us start, we cut deals. We discount left and right because we’re just trying to get our first clients and, in some cases, because we’ll just do whatever deal it takes to get those first few. But most of the time, it’s actually because we’re not confident in our own value proposition. Only as we get more skills and experience and confidence in our abilities do we start to charge more.

This seems to crop up the most at firms that charge hourly and retainer fees, because all the value proposition is on you to demonstrate the value of your time. I’ve seen a lot of firms that raise their fees 20%, 50% or even 100% in their first year or two. They launch their firm charging around $1,000 for a plan. And within 12 or 24 months, they’re charging $2,000 or $2,500 for a plan. And it’s not because they got twice as valuable with two years of experience. It’s because they became twice as confident in the value they’re already providing, and maybe got a little bit better with some experience.

But it’s crucial to recognize that most of the fear you have about a fee increase is in your head. It’s not actually about what the clients are going to do. It’s your confidence or lack of confidence in your own value proposition.

This lack of confidence actually has a name: the imposter syndrome. It presumes that we often question our own value. If we start questioning our own value along the lines of, “Why would clients pay me $100 an hour or $150 or $200 or more?” we show we’re not confident in our value — which means clients aren’t confident in our value either, and then they don’t want to pay.

FINDING BALANCE
All this being said, it’s worth noting you still may lose a client or two if you raise fees. Some client relationship is always going to be on the line: They were already a little dissatisfied, and your news of a fee increase will put them over the line. But it’s crucial to recognize that’s not necessarily a bad thing, even from a pure business perspective.

Let’s say you’ve been doing basic planning and you’ve been charging clients $150 a month — for $1,800 a year — and you find out that you’ve become more experienced and specialized. You want to raise your fees to $200 a month. And it turns out when you break the news, 10% of your clients say, “Eh, sorry. Thanks, but no thanks.”

Now, for most advisers, losing 10% of their clients all at once would be pretty traumatic. But you know what happens when you raise your fees from $150 a month to $200 a month? That’s a 33% increase in fees.

Your revenue is still up over 20%. You made more in higher fees than you lost in clients. And you know what the better news is? Your revenue is up and you don’t have to do as much work because you just got rid of 10% of your clients who don’t value what you do. You raise your fees, lose some clients and make more money doing less work.

I’m sure a few of you are thinking, “Jeez, are you just trying to rip off clients by taking more money for doing less work?” But again, this is the imposter syndrome. I’m not talking about trying to make more money for doing less work. I’m talking about getting paid full value for what you do and not doing busywork for people who don’t value your time.

And so the bottom line simply is this: If you’ve been wondering about a fee increase and are really concerned about the impact, ask yourself, “Is the risk really that clients won’t value what you do, or is the risk that don't have confidence that you’re worth the new fee?”

And if confidence is issue for you, then yes, it’s fair to take a hard look at your business and make sure you’re really providing value. But I’d also encourage you to go back, listen to Carl Richards’ podcast on the imposter syndrome and think a little bit about how much of this is a value problem and how much of this is in your head, in your own views, about your value.

So what do you think? Do you need to raise your fees? Have you successfully raised fees in the past? What is the best way to raise fees? Please share your thoughts in the comments below.