Should We Raise Fees on Legacy Clients?
Beverly Flaxington is a practice management consultant. She answers questions from advisors facing human resource issues. To submit yours, email us here.
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We are having our best year ever. Last year was previously our best year. We are up in terms of AUM, overall revenue, and fees. However, we have a number of legacy clients who are on old fee schedules. We want to bring them into alignment, so we are fair to all clients.
The issue is that some of our advisors believe this is unnecessarily “greedy” (that is the word that is being used) because the firm is doing well overall. We have been able to profit-share and offer significant bonuses. The partners, including me, believe this is exactly the time to implement the fee increase. Our returns are incredible, and clients are very happy. In some cases, the fee increase will be nominal. But in some cases, it will be a 100% increase when a client has been here for 25 years or more.
Is there a way to negotiate a middle ground with my advisors? I don’t want them to do something they believe to be unethical, but we have to make decisions despite whatever conditions are going on in the market.
Have you discussed implementing a fee increase before? I’m curious how long the discussion has been going on and whether your advisors had resisted doing it in the past and now this is a new reason. This could go in the category called “never a good time.”
I lean toward your thinking that, when times are good, it is the best opportunity to bring alignment to fees and adjust for market conditions. I have seen many advisory firms using multiple fee schedules and many advisors resisting increasing fees on legacy clients, only to find that when they do so, there is very little resistance.
This said, there are a few things I’d recommend:
- This is a great opportunity for a full firm meeting on this subject. If you are not in person yet, do this virtually but have the agenda be discussing why the fee increase is needed. List out the pros and cons of having an increase without reviewing what’s happening in the market and with your firm.
- Review what would be a good time. What conditions would your advisors want to see to be comfortable with a fee increase? Would it be when the market is struggling or when clients are starting distributions? Would it be when one of your investment strategies falls out of favor? Don’t pre-judge the audience, but point out that doing this when times are good is one option. Waiting until times are not so good is another option. But there are ramifications that go with both. Again, it is a pros versus cons discussion.
- Discuss the steps your firm will take to communicate with clients about the increase. This is the singular difference I’ve seen with advisory firms who implement a fee increase without a hiccup versus those who struggle to justify the increase. If you proactively communicate, don’t apologize, explain and then put the fee in place without negotiations or side deals, most clients realize they have been getting a deal for a while and don’t make waves.
- Have a plan B. There could be clients for whom the new fee is unreachable. I’ve seen this many times where smaller accounts end up paying an exorbitant amount if, for example, you are setting a minimum fee in the new iteration. Perhaps you can move these clients to a junior advisor in your firm at a standardized approach and lower rate. Or, you could refer them out to a colleague who has a different model and could afford to manage them.
This is a nice opportunity to bring the firm together to discuss this and gain agreement for whatever steps you decide to take. You run the risk that your perspective may not be the one that “wins.” You have to be prepared in the event that the conversations do not support your position. If you are comfortable with this, approach it in this manner.
Do you work with any advisors who have clients complaining because the firm is making too much money with the way the market is going? I have a networking group and we’ve been getting together for the first time this summer since COVID. We have had three lunch meetings and at the last one, one of my colleagues, who runs an advisory firm, said his wealthy clients are giving him trouble because they believe he and the firm are making more money than is necessary.
I’ve not heard or seen this. Is it a trend in the industry? Our clients are so happy with what we are doing none even inquire about fees. But I don’t know if I should be ready to handle this objection.
Well, this is a new one for me. If other readers are experiencing this, please leave a comment on this article. It strikes me as similar to when you would buy an expensive home or a nice new car and tell the agent or the sales rep they don’t deserve their commission because the prices are so high!
I wonder whether your colleague’s firm is doing a good job of what I call “re-telling and re-selling value” where they are reminding clients why they have chosen them, and the work they are doing on their behalf.
Sometimes advisors take for granted that because times are good, clients are happy and see the value. But I’ve found there is a need to reinforce what you do, how you do it, and why it is different. Getting lax about this or ignoring existing clients and assuming they are happy can be detrimental. It’s very possible your colleague has clients who are being wooed by other firms and are looking at the fees they charge and questioning whether the client is receiving the value for what they are paying. I don’t know how close you are, but you might want to suggest this at your next networking meeting.
I’m always open to hear what others in the industry have to say on a given topic. Please comment and let me know your thoughts.
Beverly Flaxington co-founded The Collaborative, a consulting firm devoted to business building for the financial services industry in 1995. The firm also founded and manages the Advisors Sales Academy. She is currently an adjunct professor at Suffolk University teaching undergraduate and graduate students Entrepreneurship and Leading Teams. Beverly is a Certified Professional Behavioral Analyst (CPBA) and Certified Professional Values Analyst (CPVA).
She has spent over 25 years in the investment industry and has been featured in Selling Power Magazine and quoted in hundreds of media outlets, including The Wall Street Journal, MSNBC.com, Investment News and Solutions Magazine for the FPA. She speaks frequently at investment industry conferences and is a speaker for the CFA Institute.