How to Understand the Value of Your Services

By David I. Leo

Helping Financial Advisors organize, structure & grow their businesses; Coach/Consultant to FAs; [email protected]

Introduction

Is Value Based on the Costs of your Service Model?

Are clients paying for the value you provide or the costs you choose to incur along the way to developing the services and value you want to provide as the business owner?

If the all-in run costs and the desired net profits of your business are $500,000, including advisor/owner compensation, and you want to stay in business, you must have revenue to cover those costs and your net profit goal. If you have 100 clients, you must charge on a pure mean basis (the average), $5,000 per client (forgetting that charges vary, whether fees and/or commissions by tier and product.) You may then have to explain why your services are “worth” that $5,000 plus or minus. In essence, you have decided your value based on your costs.

Let’s say between your advisor/owner pay and net profits you are yielding $250,000 for yourself of the $500,000 revenue and the remainder are the all-in costs of the business (rent, heat, light, power, technology, assistant, etc.). Now you decide you want to be a million-dollar producer and reward yourself with $500,000 in pay and net profits. Because you don’t want to work any harder, or get any new clients, you decide to hire a paraplanner and another admin for total of another $250,000 new costs. Now your total costs including your new advisor/owner pay and net profits are $1,000,000. You therefore need revenue of at least $1,000,000. Now you are a million-dollar producer and all you must do is charge each of 100 clients, $10,000 average and explain why your services are now worth $10,000 plus or minus. Again, you have decided your value based on your costs.

Does this sound weird? It may be, but it seems that’s exactly what financial advisory businesses in essence do. No judgement intended.

Here’s another weird thought about value. You go to a doctor, a concierge doctor, so no insurance is involved. When you go there, you don’t ask about value, you are going for a reason whether a headache, annual check-up, heart palpitations, minor surgery, or a procedure. If you want to know the value, you can estimate it in your own way:

·????????Assistant checking your vitals = $20 (10 minutes at $120/hour)

·????????Taking your current history and rechecking vitals = $125 (15 minutes at $500/hour)

·????????Looking in your ears with that gadget with a small, bright light = $20 including amortization of the gadget…OK

·????????Looking down your throat with the same gadget = $25 because she also used a tongue depressor (one use only) …OK

·????????Tapping on your knee to test reflexes = $25 including amortization of the special hammer…OK

·????????Etc.

You get the idea, it’s ridiculous (or is it?) You are sick, you go to the doctor, she makes you feel better, or more likely sends you for tests, or whatever. When did you talk about value? You didn’t! You went to the doctor to solve your problem and decided the value was the solution to the problem. Who talks about value of the doctor, the lawyer, the brick layer, or the cost of the hammer in a hardware store? You decide what you want or need. You go to the provider. There is a cost associated with the product and/or service. You pay the cost, or you go elsewhere. Yet, for advisory service providers we create podcasts, articles, books, presentations, webinars, three meetings talking about all we do for you if you become a client, and all sorts of B.S.[1], to justify fees as if it were about value, when maybe it’s really about costs and what I want to pay myself as a business owner?

Or is Value Based on Client Perceptions?

I am not suggesting FAs don’t provide value. I am suggesting the arguments trying to develop dollar values aren’t based on any known logic, including Dalbar data. For example, I recently saw an article[2] that said, “’Value’ is defined in a number of ways — be it advancing the personal relationship, supporting the achievement of a financial goal, or even just lending an ear during a difficult time.” Now look, these points may increase my knowing you, and even liking you better than another FA, but, try and put a dollar value on it other than the time you spent “soothing the savage beast”, is just about cost. Keeping me from making stupid decisions may have a calculable value (150 bps on average according to Vanguard) but only in retrospect and who’s to say all your decisions were stupid. Some might have been winners you, the FA, suggested not buying, uh uh too risky, e.g., Bitcoin or Tesla or Amazon in 2000, 2005, 2010, or yesterday. (Unfortunately, I never made those “stupid” decisions.) Are we going to go around capturing all decisions and ranking them on the level of stupid to winners? ?These are all about time and time equals cost, so you need to calculate time to infer or imply a value.

Here’s another thought about paying oneself. Is a “comprehensive” financial plan from a million-dollar producer worth twice much or is twice as good as from a $500,000 producer? Maybe. But maybe it’s only half as good, or only 81.3% as good, or even 122.7% better. There’s only one comparative, does the plan address the client’s wants and needs? Do you have trust and confidence in the provider? Maybe you don’t even know it’s better, the same, or worser, even after it’s delivered, or 10 years later, even with annual reviews.

There is so much material and conversation about the value FAs provide or must provide to “justify” their fees. Unfortunately, there is no formula or study I’ve seen that can truly quantify value. Value is as much a state of mind as anything else. Do you think that a financial plan provides a value of $250, $2,500 or $25,000? Value is in the eye of the beholder. Justification is also a state of mind. I have used various tools like Activity Based Costing as a financial industry consultant. At best, everything is an estimate, but costs can be estimated reasonably well as time is a measurable metric. Following is an approach to costing that can estimate what to charge to reach your goal, establish the implied value you need to deliver, and have a client understand and accept your fees.

Estimating the Costs of Your Client Service Deliverables

The thesis is, financial advisors must understand the costs of their services to clients, or client tiers, so they can manage the costs of delivering a winning set of financial advisory business services.

To have a business model that generates the target costs and desired net profits:

1. Define a model of your “winning”[3] set of Client Service deliverables, the solutions you commit to/promise your prospects and clients, that will have them choose to do business with you.
2. Determine the average time it will take to develop and deliver each service component.
3. Calculate an hourly rate for each type of person that works on those deliverables, e.g., $500,000 producer has an approximately $250 hourly rate ($500,000 / (40 hours/week X 50 weeks). If you choose to work only 6 months a year but choose to earn the same amount, your rate will double to $500/hour. An admin that costs $100K including benefits has an hourly rate of $50.
4. Using your list of deliverables in your “Client Service Promise”, estimate time and therefore cost for each deliverable for each tier.

A partial Excel template looks like this.

Note that all data on this spreadsheet are examples and you are free to use them any way you’d like. If you’d like the Excel spreadsheet, please just email me your request to [email protected].

Let me explain the sheet.

·????????Column A – The service you believe is of value to your clients. We strongly suggest validating that perspective with your client.

·????????Columns B, C, D – The services you offer to each tier. The $ represents you offer that service to clients in that tier. $/2 denotes every two years. 2$ might denote you offer that service twice a year. The indications are only examples. You can even use emojis.

·????????Column F – A courtesy tier. Services you choose to provide to these clients as a courtesy to clients and do not expect these clients will be profitable.

·????????Column G, H, I – The cost for the service based on the amount of time an employee spends on that service times their hourly cost (total hourly pay plus benefits costs)

·????????Columns J, K, L – The hourly cost by type of employee, e.g., Partner/Senior FA, Junior FA/Paraplanner, administrative/operations/service, other

·????????Column M – Notes including:

o??Base – Typically needed -- Tasks that are usually part of every client’s service deliverables, e.g., financial plan, asset allocation determination, etc.

o??By client – Need typically unique by client

o??By client – Light gray – Typically unique and may require separate fee or higher fee based on the number of the six services noted, e.g., for each service the client uses that year might have a 10% increment in fees for that year.

·????????Note that several tasks state (After Year 1). This is because the initial financial plan and/or insurance review may take significantly more time in the first year with a new client and then require a similar average amount of time in each subsequent year. The initial year client costs would skew the averages and may be considered as a low or no profit in the first year of a new relationship. ?

·????????Note a good way (not perfect) to estimate time for a service is to use a time log sheet recording activities in half-hour increments. Use the categories on the above matrix. I suggest you select a month for time logging that represents your normal activities so that it includes first week and last week of the month since those activities may vary from the two middle weeks. Holiday months of November and December can be abnormal as can summer vacation months.

·????????Non-matrix activities are also recorded so you record total time worked per week. Your non-listed matrix activities can be a separate subject. Consider this however. It’s difficult to record investment management activities by client as you often build portfolios based on models for groups of clients. In these cases, you can record the time for developing a model and divide that time by the number of clients using that model and add any unique modifications as they affect an individual client. For example, you use the same ESG model for 25 clients and you spend 4 hours reviewing that model. Divide 240 minutes by 25 clients and record a standard investment management time for that subtask as 1/6th of an hour, about 10 minutes. It gets added into the total investment management time.

If you average during the month 10 hours (600 minutes) of time on non-matrix activities and you have 100 clients, you have a separate task for non-matrix activities and record 6 minutes which gets added to the cost for every client. This way all your time and costs get “charged out” or allocated. This approach assumes everyone pays equally for non-client specific practice time. You can take more complex approaches.

Overall, we are going to record all investment management time in one bucket and divide it up either by client or client tier under an assumption that larger portfolios require more effort than small portfolios. I would suggest different percentages by tier so in our example sheet, Tier AAA clients may get a cost allocation of 50% of the total investment management costs divided by the number of AAA tier clients. Tier AA clients may get a cost allocation of 35% of the total investment management costs divided by the number of AA tier clients. Tier A clients may get a cost allocation of 15% of the total investment management costs divided by the number of A tier clients?

·????????Note that nothing is perfect in time studies. They are also not a lot of fun. There is a need to be as accurate as possible and are only done occasionally based on business changes. I have seen cases where people estimated they have worked as many as 179 hours in a week. That’s more than 24 hours a day all 7 days of the week. Reality is critical.

Costing Example – Client Communications

This time cost for client communications services is one of the many things you provide to your clients. A one-hour meeting with the $500K Senior FA would have a cost $250 in time value. Let’s say a one-hour meeting requires an hour of prep and a half-hour of follow up including recording in CRM, sending a meeting review to the client, reviewing to dos with CSA, etc. The advisor is spending or investing $625 for that meeting. At two meetings a year and two 15 minute “check-in” calls, an advisor is spending or investing about $625 + $625 + $125, or $1,375 in proactive client communications. Double you production goal from $500K to $1MM and you double your rate and time value…simple math. One simple point is, unless a client is providing at least $1,375 in revenue to a $500K producer, they are unprofitable, even if you do nothing else for them.

Now you must add in the cost of the other services the clients in this tier receives as shown on the Client Service Matrix such as:

·????????Investment management time/cost or the cost if you are outsourcing investing

·????????Financial planning time/cost

·????????Insurance planning time/cost

·????????Estate planning time/cost including speaking with attorneys

·????????Education planning, or discussing estate planning with their attorney

·????????Tax planning with CPAs

·????????Philanthropic planning

·????????Plus, Reactive client calls (non-matrix activity)

·????????Plus, Fixing problems (often non-matrix activity. Assume problems happen relatively evenly across clients over the years)

·????????Etc., Etc., Etc., the 40 or so items that are part of your Client Service Model

As stated, and it should be an agenda item, you will want to review your Client Service Model (by tier) with your clients periodically and determine if they value the services you provide. If the client doesn’t value the services, or values them differently, you need to know that and what value they place on them. At some point you may need to convince them of the importance of what you provide.

You need to be selective about the clients you accept into your practice beyond their asset level. Their likability, whether they follow your advice, their past relationship with you and, whether they want what you offer as services, and other factors you will base your decisions on, when deciding if you will work with a prospect. All those points are important considerations, but as important, is will the prospect be profitable which means they must fit your business model?

You may have to have the discussion. For example, “I’ve just reviewed our approach to our business. We have a process that we adhere to, a way of operating we believe is in the best long-term interests of our clients, and how we run our business as it relates to our standard fees. We have a committed set of services we provide based on our comprehensive approach to our client’s needs. We strongly believe these services are in your best interests.” You can make some modest modifications such as adding or deleting an in-person meeting but in general, if a client only wishes a single service such as Investment Management, you and the prospect may reach the conclusion there is not a fit between them and your business model.

In Summary

If we just execute our work in the right way, whatever that is, and there is much written on that subject, what we do is the value we provide. If prospects want what you offer, they are confirming the value. Share what you do with your prospective clients, offer them your best efforts at delivering it, and execute well.

The bullshit such as “I am a financial advisor because a vacuum cleaner salesperson took my dear departed mother for $300 after my father died and I wanted to prevent people from being taken advantage of ever again”, is even more stupid and irrelevant, than trying to calculate the dollar value of “peace of mind.”

Your business model and business plan are the mechanisms through which your practice generates its profit, keeps you and your employees, employed, and pays all the other cost of operating your business, i.e., it keeps the lights on.

Determine how much time you spend on services for clients by tier and the other tasks in your business including planning services, investment management services, communications and client relationship management services, problem resolution, other extended services, as well as team management, self-education, compliance, and a host of other activities. Those “other” activities include too many emails and inbound phone calls. Manage your costs, build your fees to cover your costs and profit goals, make offers, stick to your business model, and execute well. ?

The point here is to organize and structure your business as best you can, based on the realities of your current book of business, your team, an effective and efficient set of roles and responsibilities, your business plan, and the goals your plan includes. At the end of the day, your costs must be managed first, so the value you must provide can be estimated to create a profitable business. While profit may be the ultimate motive, it is also important to keeping your business up, running, and available to your clients over their lifetimes because they depend on you for their financial well-being. Without profit, there is no “you” to provide valued and needed services to “them.”

David I. Leo

David Leo is Founder of Street Smart Research Group LLC. He is an author, speaker, coach, consultant, and trainer to financial professionals. David is an experienced business manager who works solely with Financial Advisors, Planners and firms who want to organize, structure & grow their businesses by attracting, servicing, and retaining affluent clients.

David had a 30-year career at IBM including as a Business Process Reengineering Consultant and Engagement Manager for the Financial Services Industry. He also spent seven years at UBS/PaineWebber working directly with Financial Advisors to assist them in productivity growth.

David received a Bachelor of Science degree in Commerce and Engineering from Drexel University and an MBA from New York University.

If you would like additional details or have any questions about his articles or an interest in coaching schedule a free 45 Minute Strategy Session @ https://calendly.com/davidileo or contact him @ [email protected]. Call 212-598-4229 (Office) or 917-379-1249 (Cell) and visit @ www.CoachDavidLeo.com.

[1] Spellcheck doesn’t approve of bullshit

[2] https://rethinking65.com/2021/10/25/year-end-planning-tips-to-grow-your-practice/

[3] What you believe is your winning set of deliverables which you adjust over time to determine through experience you have been correct, or correct enough to have built a solid, profitable, sustainable business, i.e., none of us know “exactly” what that is but that’s what we all work on.