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Hosted by Financial Advisor Coach, Ray Sclafani, "Building The Billion Dollar Business" is the ultimate podcast for financial advisors seeking to elevate their practice. Each episode features deep dives into actionable advice and exclusive interviews with top professionals in the financial services industry. Tune in to unlock your potential and build a successful, enduring financial advisory practice.
Ray Sclafani (00:00.366)
Welcome to Building the Billion Dollar Business, the podcast where we dive deep into the strategies, insights, and stories behind the world's most successful financial advisors and introduce content and actionable ideas to fuel your growth. Together, we'll unlock the methods, tactics, and mindset shifts that set the top 1 % apart from the rest. I'm Ray Schlaffani, and I'll be your host.
This may sound like a rhetorical question, but I don't mean it to be. Here's the question. Do you know your true value? There are advisory firms that are evolving their revenue models to better capture and deliver true value and impact to clients. As Mark Tiburgien points out, financial advisors operate in a unique industry where advisors are often paid for the value of the client
brings to the relationship rather than the value the advisor brings to the client. Jokingly, he likens this to doctors charging patients by the pound. In an industry where fees on assets under management drive recurring revenue for wealth managers, it may seem as though the larger the client's investable assets, the higher the advisor's fee. Regardless of the actual value or impact he or she or the team provides.
This is a particularly important observation when considering the value chain. For years now, AUM has essentially been our industry's only accurate scorecard. It's how firms measure themselves against their competitors and the yardstick advisors even use when comparing themselves to their peers. But in truth, AUM is merely one factor, and I think a relatively inaccurate one, for measuring success. If we want to reflect the true value advisors provide,
we need to explore revenue models that better capture that value. I'm not here suggesting that we're gonna see a dramatic shift in the fee on AUM revenue model. In fact, it's a model that works really, really well for many, yet as the client demands shift and advisors are delivering more value to clients in a state, tax, trust, risk, family governance, giving strategies.
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there's going to be some sort of shift in terms of how advisors frame their value proposition. We often overlook some of the other drivers of revenue and profitability for advisors, such as the number of clients served per advisor. That's an important data point. The profitability of clients to time spent, the capacity of each advisor, and even the value advisors deliver through relationship building. Bob varies at Inside Information,
published last year his 2024 Fees in Motion Report, offering valuable insights into the state of the advisory profession. It's important to note that Vary's audience primarily consists of fee only advisors representing only a small portion of our industry. Most top advisors across all channels are primarily fee only. I don't see that changing again in our lifetime, but advisors are clearly becoming savvier. As witnessed by the following three key adaptions,
which are becoming increasingly relevant. Number one, adding additional services and finding new ways to add value and make an impact while increasing fees for these additional services. So this may seem obvious, but it can happen in various ways, including increasing basis points on assets, charging project fees, separate advisory fees, or a combination of both. The second adaptation is communicating more effectively with clients and outlining those services, the deliverables,
and the advice provided in writing. And number three, engaging in a rich dialogue with clients at least once a year and asking what I consider to be the most powerful question you can ask a client, which is, what do you believe we've achieved together during this past year or in the many years we've worked together? Often clients don't immediately think of what their advisor or advisory firm has delivered in terms of achievement. However, when you ask about this achievement,
It forces this powerful reflection. Document what the client has to say. Keep a running year over year list of the many things you've achieved together. And it might include hosting and facilitating one or more family meetings about wealth transfer, devising solutions to reduce clients' taxes or coordinating with their estate attorney, having extensive conversations about families' philanthropic goals and giving strategy. Keep in mind that
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Managing or overseeing the management of your clients' investable assets and building a financial plan are merely table stakes in today's advisory marketplace. I bring all of this up because I don't know that the clients always think about the word achievement. So I would encourage a tip here. Each of your advisors and team get together, look at relationship by relationship. Start with the revenue per household at the highest level and start
thinking about all of the achievements, what you believe to be an achievement may not be what the client understands to be or might view as an achievement. But by bringing that forward elevates the awareness of all of this. When I look closely at various research, there are what I call the future of advisory compensation, and it's becoming multifaceted. And according to his survey, a few data points here, 30 % of firms now generate a portion of their revenue from
hourly fees for core planning work. I'm not sure that's super duper scalable, but it's an interesting data point. More than 35 % of firms generate revenue from flat quarterly or hourly project fees for add-on services. This we're seeing more and more. And 20 % of firms use monthly subscription fees to capture consistent ongoing value. Michael Kitsis and I have spent some time talking about these subscription fees. And while we are in a subscription economy,
Maybe for smaller clients, young professionals, millennials and Gen Zers who are getting started in their career and don't have the assets or the complexity of wealth, maybe better off paying a small monthly subscription fee to capture that consistent ongoing advice and guidance. Smaller firms in the wealth advising space are embracing these alternatives to simply AUM-based compensation models. Again,
I don't think we're seeing a massive change in the fee on AUM modeling, especially for larger firms and those firms acting as full fiduciary. But it is important to note what are some of the competitors on the smaller end and intermediate end doing with their fee structure? More than one third, 34 % of firms with annual revenues of under a million serve some clients via hourly fees. And I know most of you
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listening to this podcast are not generating under a million per advisor in your firm. Most 10 % of firms with revenues over 10 million. So again, very small percentage of firms are doing that. It's important to note that larger firms for the most part are putting all of their eggs in the AUM basket. Why? Well, simply put, AUM fees provide predictability and reward those advisors during market appreciation.
So whenever you're listening to this podcast, there's always volatility in the marketplace. It's not all going up forever. But what happens when the client begins to question whether the fee reflects the value they're receiving? It brings to mind that famous 1970s Mercedes Benz quote, in the absence of value, fees are always a question. It highlights the notion that clients are far less likely to question the cost of a product or service when they perceive its intrinsic value.
And if that value isn't clear or justified, the fees or price will likely become a point of contention. Interestingly, you know, during the five year period from the end of December 31st, 2019, five years ending December 31st, 2023, the Barron's ranked top 50 wealth managers grew by 150%. The exponential growth of these businesses
They actually experienced an expansion, not a compression of margin. So in other words, those advisors at the highest end who are highly FION AUM focused are actually growing the value for clients and the clients are embracing that structure. More than 55 % of advisors surveyed in VARI's study do not charge for initial financial plans when onboarding new clients.
Larger firms are even less likely to charge an initial planning fee, often seeing it as a lost leader to solidify that client relationship. So for firms that do charge upfront, fees range from $2,000 $7,000, depending upon the complexity, again, of clients' needs. We're going to see more and more firms in the advisory space, such as other professional services like law firms and large consultancies, routinely charge additional fees for extra work.
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outside of the initial engagement scope. This will become more prevalent at the higher end, at the ultra high net worth and high net worth segments. When an advisory firm client experiences some life-changing event that requires more profound, more comprehensive planning, advisory firms should be compensated for their time, expertise, and advice. In fact, consider the significant value the client receives during these times.
and then align a fair and reasonable fee for service that reflects the advisor's value. If an advisory firm doesn't frame that upfront at the beginning of the relationship, it's always more complicated to introduce that during the nature of the relationship. So think about that as you're going to market and considering what do our clients value? If they just value the fee on AUM and the growth of client assets, you're likely to be really questioning five to seven to 10 years from now
whether or not you'll retain lots of those clients. Let's talk about discounting really quickly. Some advisors discount their fees, particularly on the basis points on assets, and that signals to the client that the value being provided is what I would call, quote, less than. The discounting happens because the overall value and impact of an advisory firm's work just aren't well communicated. This might have made sense in the old structure where fees were tied solely to AUM and managing money, but in today's
evolving model, the most influential advisors deliver far more than investment management. I bet your firm does too. If you're discounting fees, it may mean that other aspects of the value you provide, such as strategic planning, estate management, family legacy facilitation, they're not being communicated clearly or simply or not valued by the client. This could indicate that you're either attracting the wrong clients or haven't
effectively framed your services beyond investment management. If you don't charge an initial planning fee, consider starting small, begin charging new clients with complex needs for the comprehensive planning you provide. This could boost profitability and strengthen client relationships by simply highlighting the value of your expertise. It also sets the stage for future project work, allowing clients to understand that specialized services, which won't be specialized in the future,
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warrant additional compensation. So let's do a quick study itemizing your value here. We're still in the early stages of this shift. I want to make a point of it because I think at this moment in time, we are seeing evidences of new revenue streams being introduced. However, the only way to prepare for the future of advisory compensation is by understanding the initial costs associated with delivering your services. What's the actual value
of each lead advisor and their time at your firm. When I ask advisors this question, the estimates are widely varied from $100 an hour to more than $1,000 an hour with an median value at about $400 an hour. This uncertainty signals what I think is a missed opportunity. If you don't know the value of your time and each of the lead advisor's time and expertise, well, how do you charge appropriately?
Only a small subset of firms currently track the time their team spends on different tasks to determine the cost of servicing or onboarding clients. Yet without this data, you risk underpricing the value you bring to client relationships. I was visiting with the CEO of a three and a half billion dollar firm this week, and it was interesting. He was sharing with me in Salesforce, their CRM system. They have very specific tasks in terms of their workflow.
And each task has an estimate in terms of amount of time, 15 minutes, 30 minutes, hour, two hours, whether it's prepping for a client review, an actual client meeting, onboarding a new client, ACAT transfers, et cetera, et cetera. They've got a really excellent laundry list of those activities and the time spent per. And once a quarter, they just run a time analysis to determine, they over-serving certain clients, under-serving other kinds of clients? And so,
There are very actionable steps. I would start by tracking the time your firm spends on various client services. Think about how to quantify this time and how it will provide the valuable insights into the true cost of delivering your services and help you better align your fee structures. But I wouldn't stop there. Also track your firm's tangible and intangible impact on the lives of your clients. This can include all the measurable outcomes
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reducing estate taxes through careful planning, executing tax loss harvesting strategies, renegotiating lower mortgage rates, advising clients during contract negotiations to secure better executive compensation. All of these additional services, I consistently hear advisors advising clients in these areas. Equally important are the less tangible, but highly impactful moments like facilitating family meetings to discuss legacy planning.
or giving clients that peace of mind that comes from feeling financially secure. These contributions may look different for each client, but they all represent your true value in your clients' lives. By tracking the measurable and immeasurable outcomes, you'll be able to demonstrate your value more effectively and then long-term justify those fees accordingly. You're probably thinking, Ray, right about now, we don't feel like we need to justify our fees accordingly. But again,
Now is the time to really sharpen your pencil around how do we know the clients truly value what it is that we do. The tide is turning. While 75 % of firms using non-AUM models do so to serve younger clients or those who don't meet AUM minimums, a growing percentage, 35%, are shifting due to preferences expressed by their wealthiest clients. More affluent clients now request flat monthly or quarterly fee structures.
and advisory firms would be wise to pay attention. Fee structures will evolve. They'll always going to evolve. But the best way to prepare is to begin analyzing and quantifying the time you spend on various client tasks. This is going to allow you to budget your time more accurately and better manage profitability and capacity. The best in the business re-segment their client roster twice a year, especially if they're in growth mode. They want to know for each revenue
per client segment, how much time and which team member at what billable rate is spending on each client. Do you have any clients that are being over-served? Which of your clients are being under-served? Advisors frequently share with me that their most affluent clients, sometimes with the most complex situations, actually demand the least from their advisory clients and are the most profitable relationships.
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Any kind of analysis around your firm and your team will help you make better business decisions as you scale and grow your firm into the future. Consider expanding services beyond investment management and general financial planning. Know your value by engaging in a dialogue with clients about what they want and need. And I would encourage you to talk to your next generation heirs, the inheritors of your current client's wealth. What do they want?
And what do they need? Remember, build the business your clients want, not the one you want to build. By doing so, you'll be able to grow your firm profitably and sustainably. Remember this, that the time to act is now. The advisory profession, I think, is really at an interesting turning point. It's not a dramatic turning point. That's not what I'm saying, but there's an evolution that's happening. And the question is, how will your firm adapt and grow with it?
How prepared are you to adapt your firm's fee structure to reflect the true value you provide? Or will you continue to just simply rely on fee on AUM alone? I'm not suggesting a dramatic overhaul on what you're doing. You're listening to this podcast because likely your firm is highly successful. However, it's always important from a strategic planning perspective, at least once a year, to peel that onion back and ask some really important introspective questions.
Start by reviewing your fee structure. Understand the value you do bring. Find ways to capture that value. Ask clients in each client review what they feel like they've achieved in working with your firm. And the sooner you begin, the more prepared your firm will be for the future of advisory compensation. After listening to today's episode, consider discussing these coaching questions with your leadership team, your next generation team members, and your client advisory board.
One, how can we better communicate the total value we provide to clients beyond just managing assets so that we can ensure our fees reflect our true impact on our clients lives? Second, in light of our industry's evolving revenue models, what steps can we take in the next three to five years to diversify our fee structures and ensure sustainable growth? Three, what opportunities do we see to integrate more
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personalized services such as family legacy planning or philanthropic advising into our offerings and how can we effectively charge for these services? Four, how might we enhance client engagement through more consistent communication about achievements and outcomes, ensuring the client recognizes the breadth of value that your team delivers? Number five, considering our AUM based fees, how can we measure and demonstrate the return on investment
clients receive from our advice, particularly in the areas like tax savings, financial security, or long-term planning. Well, thanks for tuning in. And that's a wrap. Until next time, this is Ray Sclafani. Keep building, growing, and striving for greatness. Together, we'll redefine what's possible in the world of wealth management. Be sure to check back for our latest episode and article.