When I read Steve Wershing’s post last month in The Client Driven Practice blog, I sat up in my chair, put my phone down and swore out loud.  To me, it was that good.

In the reprinted post below, Steve asks you to consider a scenario where instead of depending on the automatically deducted fees that most advisors use for compensation, what would happen if clients had to write you a check every month/quarter?  Would your service model change? Would your value proposition change?  I think this mental exercise is a great way to put yourself in the clients’ shoes and judge the value you provide – are you worth what you charge and does your client know?

Please read Steve’s post below (with or without swearing) and consider what you would do.  Do you think your clients would pay quarter after quarter?  -- JDA

What would be different about your business if charging a percentage of assets were no longer an option?

Steve WershingWhile the most popular method of charging clients is under no immediate threat, thinking about their demise may give you some insights for your strategic planning.

There are clear benefits for this fee strategy. Considered in relation to the activity being paid for, investment management, it is insanely profitable. It’s also invisible, being automatically debited from the portfolio. (There are big benefits to avoiding asking people to pay several times per year. I have long been of the opinion that if payroll deduction of income taxes were illegal and we all had to write a check to the Internal Revenue Service once a year there would have been a tax revolt years ago.) There are disadvantages as well. There are built-in conflicts of interest (am I better off leaving my money in the 401(k) or rolling it over to you? Should I withdraw from my account to pay down my mortgage?) Revenue is volatile, fluctuating with the value of client accounts. What provisions have you made in your business plan for the possibility that revenues may drop 30% in the next bear market?

And the method of billing is disengaged from many of the activities that deliver value to the client. You are getting paid for one thing while possibly generating value from something else. That can (and probably should) lead to questions on the part of astute clients as the relationship grows. For example, consider a client whose initial plan was completed several years ago and who recently liquidated a company, generating proceeds of $5 million. She would like to invest with you. Before she does, she asks “I am about to pay an additional $50,000 to you every year. How will your service to me change?” How would you answer that question?

The best protection you can build for your business is a value proposition clear and powerful enough that people would not unflinchingly write a check to obtain the service. Here’s a thought experiment you can try to test whether yours is powerful enough. Imagine being in a new ideal client with $1 million to manage. Assume the government just made calculating fees based on assets under management illegal. You still charge the same rate (1%, for example, would be $10,000) but they have to pay you by check.

How would that affect your client presentation? Knowing they would need to write a new check every year, how would you document the work you do and the value you deliver through the year?

What changes would you make? And how can you incorporate some of those changes today?

Legal Note

The opinions and views expressed herein are those of Stephen Wershing. SEI bears no responsibility for their accuracy. Stephen Wershing and The Client Driven Practice are not affiliated with SEI or its subsidiaries. Investing involves risk including possible loss of principal.


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