At a recent workshop Militello Capital conducted exclusively for RIAs, I couldn’t help but to overhear a conversation between two advisors. They were both asked a similar question by their high net worth clients.
The question: “Tell me how you earn your 1% annual advisory fee.”
KaBoom! The question every advisor fears most—or at least should. Now you’ve got my attention!
I was going to start my presentation, but I stopped to listen because this conversation was about to get juicy. I watched curiously as two accomplished advisors stared at each other, neither wanting to answer first for fear that their answer was somehow insufficient, or sound incompetent and unprepared.
Then one advisor broke the ice and offered an answer that simply listed the activities he performs. Advisor #1 recounted what he told his client: “Well…ummm…I rebalance your account regularly. I help you choose a risk tolerance model that is consistent with your financial objectives…and…ummm… at the end of the year, I conduct tax loss harvesting to minimize your tax bill.” He forced a smile looking to Advisor #2 for approval who offered an equally subjective answer.
Advisor #2 answered the question this way, “Investor behavior is not always rational and I bring discipline to often emotional decisions around money to protect you from making a bad decision at the wrong time.” Advisor #2’s answer was intelligent and logical, but he admitted that even his discourse on behavioral finance failed to answer the mail.
Why wasn’t either high net worth client satisfied with their advisor’s answer? The advisors listed the tasks they perform but they failed to demonstrate value. And we all know that in the absence of perceived value—your fee will always be challenged. Are you ready to be challenged?
Ok, maybe you meet quarterly and offer your version of an asset allocation model, but there is no perceived value in your pie chart—none, especially by the high net worth client.
The coveted client of any RIA is the high net worth client, and he is about to ask you to justify the tens of thousands of dollars he pays in advisory fees each year. After all, would you pay thirty thousand dollars per year to rebalance a 60/40 allocation to index mutual funds? The fee charged as a percent of the assets under management (AUM) has fallen precipitously over the past decade due in large part to investors’ perception of the value (or lack of value) they receive.
Do I have your attention yet? It’s getting tougher and tougher to be an RIA. Your world has changed, are you going to change with it or get run over?
So, how would you defend your fee? If you want to learn how to attract and retain the high net worth client, then ask to attend my workshop. I promise that you will never have to defend your fee again. I look forward to meeting you!
By William J. Militello, CIMA