One of the criteria for taking advice is needing it.
If people don’t believe they need advice, they won’t take it, and they definitely won’t pay a premium for it.
People will generally seek advice when they face a complex situation in their lives that they want to overcome, yet do not have the time, ability, skills, knowledge, or desire to solve without assistance.
Because our skills, knowledge, desires, and abilities are many and varied, complexity is different for each of us.
Complexities can be obvious.
For instance, an airline engineer is retrenched when fifty-three years old. He doesn’t want to retire nor does he believe he can afford to, despite a good redundancy payout. His best employment prospects are overseas, yet his youngest still has three years of school and his spouse is reluctant to move.
Determining all the financial options and identifying the best – considering the needs and objectives of this family – could be complex.
Also consider the case of a thirty year real estate veteran with two sons working in the business, wondering how he can retire to his coast beach house and leave a business big enough to financially support both sons. The eldest has four children, no real estate talent, and is lazy. The younger son – quiet, extremely talented, and without family – is a natural at the business.
The father wonders how he’ll financially manage and counsel the transition. He believes giving control to the eldest son, or making both equal managing directors would be a disaster. He has delayed his exit, unsure of how to both keep the business going and pass it on fairly.
Complexities can also be not so obvious.
For instance, a busy-working thirty-something couple without kids can’t get their cash flows into order. Despite good incomes, they’re behind in their taxes, can’t save any money, and are always just paying their bills at the last minute. Saving enough money to get a deposit to buy a house is more complex for them than for most of their friends.
To some the answer is simple, but to this fast-earning and fast-spending couple, it matters little how ‘simple’ the solution may appear to others.
To them, they are suffering in a situation of serious financial complexity. They haven’t been able to find a solution that suits them.
Whether they’re advising the fast-spending couple, retrenched engineer or real estate proprietor, advisers seeking a premium for their services must:
- identify and understand the subjective complexities their clients wish to overcome;
- understand the outcomes desired by the client; and
- drive all efforts towards the attainment of client’s outcomes while managing their complexities.
Clients will only pay premium advice fees when they have confidence that their advisers understand the financial goals that are important to them, and the specific financial complexities they’re suffering from.
From our client’s perspective, it matters little how much time their advisers spend working on their issues, or which products they use. It matters a lot that their complexities are resolved or managed to enable them to better achieve their goals.
Pricing on the client’s complexities
Say you’re a financial planner with two clients.
- Client A has $1,000,000 in investable assets, and no complexities surrounding her money or how it’s going to be managed.
- Client B has $100,000 in investable assets and calls regularly about his investments, questioning his risk profile, wondering whether he’s making the best return from his money.
In this simple example, the $1,000,000 client needs less advice, reassurance and peace of mind than does the $100,000 client.
Pricing on complexity means that the $100,000 client may in fact pay more money in advice fees than the $1,000,000 client.
This is contrary to outcomes in most planning firms, which price on the level of product rather than the level of complexity.
Fundamentally, the fees clients pay should be proportional to the amount of complexity in their financial lives. Advisers should never assume they understand the complexities their clients suffer.