May 28, 2015
- Content Manager , Business Performance Solutions, TD Ameritrade Institutional
“As content manager in Business Performance Solutions, I work on a team committed to bringing advisors insights, programs, tools, and resources designed to build sustainable growth and enduring value for advisory firms.”By Kathleen Rooney, Content Manager – Business Performance Solutions, TD Ameritrade Institutional
Be sure to read my first blog in this three-part series that sets the foundation for making sure your pricing reflects your value.
Now that you have a better understanding of the benefits and structure options for a well-planned pricing model, you’re ready to begin reviewing pricing principles to help determine your pricing levels.
But before you get started, you’ll want to review these three key fundamental areas that will influence your pricing levels:
• Competition and the going rate in the market
• Value delivered to clients
While industry pricing data can be a great reference point for you, keep in mind that using market-based pricing alone won’t be enough. While many firms share common offerings like retirement and estate planning, not only will the combination of services between firms differ, so, too, will the breadth and depth of each component. Because this makes for a difficult apples-to-apples comparison and because the market for advice is continuously evolving, this market-based information should certainly inform, but not decide, your firm’s pricing model.
What is my cost to serve my clients?
Cost-led pricing in its simplest form is calculating your costs and adding a markup to create your desired profit margin. Interestingly, just 16% of all firms surveyed by FA Insight in 2014 use cost of delivery as the primary factor when determining how to price their services. While the task can seem daunting, a simple approach can be taken to assess how firm costs impact price.
You will need to complete a basic segmentation exercise and group your clients by complexity of needs. For example, you can segment your clients into three groups with segment “B” clients representing your average-complexity-need client. The next step would be to calculate the hourly rate and hours spent serving a typical B client for each role involved in the client relationship (see example below).
Apportioning Labor Costs Example—B Client (Average Effort to Serve)
The next step would be to allocate overhead expenses across all of your clients. In this example, we can use $1,868 as our average overhead cost. In order to determine the total cost to serve your typical B client, you would add the total labor cost plus the average overhead cost.
This cost basis number will give you your “break-even” number for serving your average B client. You can repeat this process with your other segment groups. The final step would be to determine your desired profit margin, and add that to the cost basis number.
Pricing Your Value
The core of this approach holds that pricing compensates a firm for the value delivered through the advice relationship. Due to factors like tax savings or lower investment fees through a restructuring or rebalancing of a portfolio, the value a client receives may be well beyond the fee paid under the cost-plus-profit model. You may want to revisit your value proposition in order to be confident in articulating the value you are delivering to clients. The ability to communicate your value will be an important factor if you decide to make any changes to your existing pricing levels and/or pricing structures.
Once you’ve decided which pricing structure(s) align best with the services delivered as well as the appropriate pricing levels, you’re ready to implement the change.
Look out for my next and final blog in this three-part series—focusing on implementation and clear, tactful communication to your clients.
For a deeper dive, including more industry trends and case studies, click here to read the full white paper titled “Pricing: Reflect Your Value,” by FA Insight in collaboration with the Business Performance Solutions team at TD Ameritrade Institutional (2015).
This information is intended to provide a general overview about the topics covered and to help you identify opportunities in your practice and important issues you may wish to consider in developing a strategy. Because TD Ameritrade Institutional does not provide legal, tax or compliance advice, this information is not intended to be relied upon as such. While TD Ameritrade Institutional hopes that you find this information educational and thought provoking, you need to determine whether the information is appropriate and applicable to you and your firm. You should consult with attorneys or compliance experts that understand your particular circumstances before utilizing any of the ideas presented here in your practice.