There are few topics in my consulting and training work that I love more than pricing.
Pricing is emotional
Effective pricing isn’t about facts and figures. It’s about courage and value.
Good financial advisers aren’t selling motor cars, cups of coffee, financial plans or other tangible goods. (Sorry accountants, but they also aren’t selling hours worked.) Good financial advisers are selling ‘peace of mind’, ‘confidence’, ‘expertise’, ‘appropriate choices’, and ‘solutions’ to best maximise the probability of their clients achieving their financial goals.
Notwithstanding obvious compliance requirements, the process of producing compliant pricing is far removed from the art of crafting an appropriate price for clients seeking long advice relationships.
The industry is slowly evolving away from an environment where the price charged by most advisers was crafted for them by actuaries working in the bowels of product manufacturing organisations. Actuaries, in conjunction with the organisation’s sales teams, determined product price based upon well-studied probabilities, external economic forces, aggressive competitive players, and required shareholder returns.
Products were handed to financial advisers with pricing options built in. Deciding how to present or pitch the price to clients wasn’t very emotional when pricing grunt work was mainly done by clever teams in the manufacturer’s think tanks.
But real pricing is always emotional. It is tough. The firms I believe are pricing their advice well know that it isn’t about getting a ‘perfect’ price, but rather, trying to get their price ‘less wrong’. If your pricing process isn’t emotional, tough, or challenging then your firm is either charging too little or far too much. Either way, I’ll predict your income three years from now will predominantly be linked to your own personal exertion, rather than to profits and dividends earned from your business irrespective of your own personal efforts.
Pricing is the industry’s Berlin Wall.
I visited the Wall in 1986, and left thinking it was so ingrained in the surrounding culture and way of life that it seemed impregnable.
It was down two years later.
Like the Berlin Wall, we need to dismantle the existing pricing paradigms in our industry. Current paradigms are preventing too many great advisers from understanding that they can price their services much more effectively than through reliance upon products and manufacturers.
Current pricing paradigms mean that too many great advisers find their revenues reducing where there is no drop in the quality of their advice. In fact, just when clients most need reassurance, confidence and leadership towards achieving their long term objectives, too many great advisers are restricting themselves in their pricing ability, and are thus earning less than they should be.
Current pricing paradigms are hiding poor quality product providers masquerading as advisers. These ‘advisers’ don’t believe they have to earn their renewal income each year. These ‘advisers’ sell products with extraordinary upfront product payments, and sell their statements of advice on technical brilliance rather than applicability to the client’s financial objectives.
Within the current pricing culture, consumers can’t easily tell the difference between over-priced product providers and well-priced advisers. Calling yourself a ‘fee for service’ adviser might be a start, but it’s only that, because the majority of fee for service advisers still see their revenues falling in the current market.
The pricing debate signals the birth of a new profession.
There are, I believe, some four separate government and regulatory inquiries in Australia into the financial services market. Even though we only represent 2% of the global economy, thanks to our $1.1T invested in superannuation built over the last 21 years of legislated superannuation, we have the fourth largest funds management industry in the world.
The financial planning industry to date has been dominated by the big financial hardware firms – banks, insurance companies, and global investment groups. The computer hardware industry of the 1980s underwent significant restructuring when the hardware was commoditised and significantly repriced, forcing many hardware suppliers out of the market if they didn’t have scale. (In 1989, IBM was the world’s most profitable company. In 1991, it was the world’s second-least profitable company.)
New pricing paradigms will accelerate the new ‘financial software’ companies – the advice groups – to better price upfront and ongoing services to make the good profits they deserve, as they assist their clients in making the smartest financial decisions to maximise the probability of them achieving their financial dreams.
New pricing paradigms will also enable advice firms to disconnect from ugly product subsidies provided by the manufacturers. These non-client based practices inflate client pricing for the wrong reasons. If the only reason that distribution remains aligned to manufacturers is due to subsidies, we have no hope of gaining the trust of our current or future clients.
Effective pricing will break down the invisible technical walls that currently divide accounting, legal, investment, and insurance professions, enabling them to better merge and even totally align to achieve the sole objective of helping clients to maximise the probability of achieving their financial dreams and goals.
Advice clients don’t come to advisers to buy products. They come to buy solutions that help them make the best financial decisions to achieve their financial goals. We need to align price with solution, which entails far more than just placing product. The advisers that work hard and constantly to do this will prosper well into the future.
Bring it on – I’m looking forward to it. These are the best of times to be building a great advice firm.