At the PLANADVISER National Conference in Orlando, a panel discussed how to price fees for service.
The majority of panel attendees surveyed about how they are most commonly paid for qualified plan business (59%) said they base fees on asset size. Nearly one-quarter (23%) said they are commission-based, and 14% use a hard dollar or flat fee, regardless of asset size. Just 4% are ERISA budget or ERISA reimbursable, and 1% said fees are per participant.
“Charge as much as you can,” advised Edward O’Connor, managing director, Morgan Stanley Smith Barney. After making a clearly humorous statement, he explained more fully that advisers should earn as much as they can and then begin to break it down into comprehensible and explainable steps.
According to O’Connor, benchmarking is a crucial first step, and there are lots of sources. “But be careful,” he cautioned, “because it can be a race to the bottom.”
Melissa Cowan, executive director, UBS defined contribution advisory program, UBS Financial Services Inc., mentioned that some advisers may hesitate to use benchmarking services for fear of locking themselves into a range. O’Connor advises against walking into a first meeting with the range of fees from benchmarking. “It’s human nature to want the smaller number,” he pointed out. Value has to be established and fees discussed, but there’s a natural build-up to such discussions.
“We try to make benchmarking about the services we are delivering and how we are delivering, not the fees themselves,” said Rick Shoff, managing director, advisor support group at CAPTRUST Financial Advisors. “That’s a slippery slope. If you’re getting paid more it’s because you are delivering more.”
Specifying tasks and keeping track of how much time each accounts for is another pitfall, according to O’Connor. “You don’t want to start punching a time clock,” he said. “Be clear and distinct, but don’t get too granular in a fee quote.”
While most attendees (72%) had not changed fee formulas in the last 12 months, 29% said they expected some change in the next 12 months. Two-thirds (66%) said they did not expect to change their pricing for qualified plan business. Panel attendees surveyed said they knew how much they need to charge on a particular plan size in order to be profitable (39%), while 44% said they did not know.
Nearly three-quarters of survey respondents (74%) felt fees are going to face some compression. Most respondents (59%) pointed to new regulations, and 15% said they thought smaller firms willing to aggressively price new business could be a cause. Another 15% said they felt larger firms might be willing to aggressively price retirement advisory services as an entry to other business opportunities, which could have an effect. Very few (3%) thought the recession was a factor.
What’s the Minimum?
The question of minimum fees was discussed, and whether a fee should be lowered in order to stay competitive. Attendees were nearly evenly split on the question of minimum fees, with 55% saying they do have one, and 45% saying they do not.
A minimum or a range is a good idea, according to Bruce D. Harrington, vice president of sales and business development, John Hancock Financial Network. “Advisers don’t like to walk away from business, but it can be a race to the bottom,” he said. Cowan added that it can help to scout the possibility in advance. That way, she said, “you can walk away if someone doesn’t meet your number.” UBS’ business is about half retail and half institutional, according to Cowan, who added, “I definitely think we put a minimum fee a few years ago so we didn’t have these really small contracts coming through.”
“Often when you feel you’re not getting what you’re worth from a client they’re taking a lot of extra time,” Shoff said. “The right minimum fee could be $25,000 or it could be $10,000.”
“Life is gray, not black or white,” O’Connor agreed. "You might go below that in an industry you want to break into, but you need to know when you’re not making money.”
Switching to the Hard Dollar Model
Switching over from a basis point model to the hard dollar role was another topic. O’Connor observed that a plan sponsor may approach the adviser. “For the mega-size plans it is hard dollar, well over 100 million, 200 million,” he said. It may be an ego boost, but advisers should understand the time and challenges involved.
A hard dollar cap can be put into a contract, Cowan noted. “I encourage people to sit down and think about how much time they’re going to spend on a plan. Maybe you can’t do education because it won’t be profitable enough,” she said. It may be difficult in the midsize market, Harrington said.
Other challenges of moving to a hard dollar model may be psychological. The asset-based fee provides a comfort zone, and it’s more transparent, O’Connor said. “Twenty-five basis points just sounds a lot smaller than $25,000,” he said.
Shoff pointed out that an organization might need to examine whether it has the actual staff necessary in accounts receivable to handle the billing aspects. Calculating the additional compensation for taking on extra ERISA duties in order to be a 3(21) fiduciary is another factor.
“If you spend 100 hours on a plan, and make 300 an hour, is that enough for you?” O’Connor asked.”You do need to be clear about the blood sweat and tears you put into this.”
It can be tricky to ask for more money, even when the time and effort servicing a plan makes it necessary.
A holistic approach works best, according to Shoff, who noted that his firm increases fees by increasing service to existing clients. “Those are the best dollars for growth,” he said. That way you’ve added value and the complexity has changed, opening the door to telling a client, “Hey, our fee needs to go up.”
The acquisition process also deserves scrutiny, Cowan said. “More risk can bring more return. How many visits do you have to make to a new client?”
And, observed Harrington, bigger clients can sometimes be more demanding. “If you are comfortable with your value proposition it’s not difficult.”
According to O’Connor there is a lot of opportunity in plan design. If you provide distinct services, advisers can use more data and more tools to benchmark.
Cowan advised that advisers mentally walk through what they do every day that is of value to clients.
When it comes time to maximize your value, O’Connor counseled, “Convey what you are bringing to the table.” Most advisers provide more than simple advisory services. “You’re actually a consultant,” he said. “You’re an outsourced government relations department because you’ll hear government information at a conference and bring it back to your client.”