How to Determine Your Pricing and Services as You Launch Your Firm

Perhaps the most daunting part of launching your firm is figuring out how to price your services. There are so many options and plenty of folks ready to tell you what you should do. You don’t want them too high, too low, or the wrong fee type. But the question remains, what is right for your firm? If you are an XY Planning Network member, head over to the Preparing to Register Your Firm: Niche and Services course in XYPN Academy and download the Pricing Strategy Worksheet so we can work through it together. Not a member yet? Keep reading! I will walk you through the process. You can do this!

How much do you want to make?

The first step is to get clear about the vision you have for your firm. What do you want to make? What do you want your firm’s annual revenue to be? Don’t envision today, but rather envision your established, solo practice. We’ll deal with staff and enterprise growth down the road. Today is about getting you started, so we envision the future, but not the distant future. The TL;DR can be this: what do you want to make? Divide that number by .8, and that’s your revenue goal. In reality, there’s a little more to it. 

To envision what your revenue should be to support your income desires you can either use earnings before owner compensation (EBOC) and assume about 80%. So $300,000 in revenue would net you $240,000 compensation and $60,000 in expenses. You can be a little more complex and use profit margins with direct and operating expenses. Common ratios are 40% direct, 35% operating, 25% profit. In this example, the $300,000 would result in $120,000 direct (salary to you), $105,000 operating (some to you if you are doing all the admin work, etc.), $75,000 profit (use it however you wish—you’re the boss) I recommend that at this stage you stick with EBOC. It’s simpler and, frankly, less stressful when you are looking at that big goose egg on the revenue line. 

How much do you want to work? 

You need to determine how much time you plan to work. Start with 52 weeks in a year and subtract what you plan for vacation. Let’s suppose you plan six weeks off. That leaves you with 46 weeks of work. How many hours do you plan to work each week? For this example, let’s assume 36 hours a week. You can assume approximately half of your time is billable, client-facing, or client service. In this example, we have 18 hours a week for which we can bill (we’ll get to how we do that in a bit. Don’t freak out and think I am going down the hourly path necessarily). Next, determine the hours in the year you can bill for. 46 weeks times 18 hours a week is 828 hours.  

Divide your revenue goal by the hours and you have your baseline hourly rate. In this case, you land at $362. That is the goal for the work you put in relative to the compensation you get. Keep in mind we are not stating that you are charging hourly at this stage. This is a baseline rate.  

Who do you want to serve and how? 

This exercise is not complete without a bit of niche consideration—your ideal client will lead you to the pricing. Do they have assets or income with which to pay? What are their preferences on the frequency of payment? By taking time to identify the details of the people you wish to serve, you can align your cost of services and the structure more appropriately.

How many households do you wish to serve? Aiming for 75-100 is a nice industry average per advisor, but you can set your limit at 50 or create a hyper-efficient firm that allows you to serve more. It all depends on your own personal algebra equation. Once you have an idea of the number of households you will serve you combine it with the niche information. Who do you wish to serve, and how do you wish to work with them? Your pricing structure reflects what you want your firm to represent and supports the client relationships you prefer. 

Determine if you like long-term relationships, a stream of new challenges, or a mixture of both. As for your clients, will they be less affluent, still accumulating their wealth, or are they well into wealth accumulation? That impacts not only how much you charge, but how you charge and how your present planning. Clients who are accumulating wealth but don’t have a lot of income are well served with one-time plans, projects, or hourly consulting. You are setting them up for success and wealth growth. The changes you help them make early on are amplified over the years. 

Offering hourly, limited, or project engagements has some pros and cons. You get compensated right out of the planning gate. You get to share your expertise while you determine if a client has the commitment and desire for a longer-term relationship. You are creating future opportunities for long-term work as clients need more comprehensive services. Each of these provides pricing that is straightforward and simple. They are easy for anyone to understand. Pricing in this manner pulls the focus to whatever work you are doing at that given time and makes financial planning accessible to everyone. In short, it is fantastic for folks who love variety and new projects. 

The challenge is in creating those long-term relationships. You put more of the onus on the client to decide if they should call you. You may find that you play “clean up” if they make some bad choices and don’t reach out proactively. You will have a challenge of business development with these engagement styles. You need to have a continuous flow of prospective clients as well as a well-executed plan for staying in touch with these clients and nurturing them for future planning opportunities. If your goal is to escape marketing and sales, then perhaps this isn’t the best structure for you. If you like variety paired with simplicity, these may be wonderful engagement structures for you!

What about AUM?

But what about those clients with higher income or assets? If you enjoy the planning challenges that come from clients with high income or a lot of wealth then you may wish to consider ongoing planning fees or Assets Under Management (AUM). There are pros and cons to these styles as well. 

Ongoing planning can be quoted as an annual fee or a monthly subscription. It can be billed monthly, quarterly, or semi-annually. The key is that it is all-inclusive. Your state will have some input on exactly how you structure this, so consult your compliance expert for details as you prepare your ADV. By billing an all-inclusive planning fee, your clients know you are always available—deciding whether or not to touch base is a much smaller decision. As a result, they are more likely to call you before they make mistakes, not after. That may allow you to avoid some of the mistake mitigation issues you can get with “as needed” planning.

When you price on a fee-for-service style you send the message that planning is for everyone, not just those with assets. This engagement assumes (or at least strongly implies) a longer-term relationship with your client. It will be a little tougher to show your value when compared to project or hourly, so you’ll need to be a bit more intentional about reviewing your clients’ progress and accomplishments as you continue to work together. The flip side is that you aren’t tying your compensation to investments as tightly. You are showing that the value is in the process of planning. You will find you have a more stable client base, which allows you to work less to fill the pipeline. 

You probably already have your own list of AUM pros and cons. It is the comfy old slipper of pricing models. You and I know there may be nicer or newer slippers available, but clients know this one, so they just stick with it, and to an extent, that goes for the new firm owner as well. It’s one less thing to be nervous about. As you meet with new clients they will already understand this pricing method if they have experience with other planners. That 1% is easy to understand and it sounds small. Renewals are almost a non-issue; your clients just keep on paying the 1%. Revenue growth just plugs along—until it doesn’t. Your revenue will ride along with the market for good or for ill. Keep that in mind. 

AUM focuses on investments. People assume the importance is where the fee is. If your planning business is heavily focused on investments, then this may be just the ticket for you, but it will draw away from all the other services and value you provide. Another consideration is that last smidgen of conflict of interest. Suppose your client gets a windfall and they have a mortgage that could choke a horse. To invest or pay down the mortgage? One choice puts money in your pocket. One doesn’t. Some advisors don’t want even that whisper of conflict. 

As you look at these fee structures, be sure to determine if you are comparing apples to apples. Some planners have a separate planning fee or an upfront fee. Separate planning fees tend to be larger than upfront fees and all will impact the ongoing fees or AUM fees charged.  

Run the numbers

Now that you have given some thought to how you’d like to work with your clients and who those clients might be, let's get back to the math. Gather all of your engagement types. You can mix and match, but remember, this isn’t Applebees; let’s have about three options at most. You have full permission to have one offering. You can set up the thing you do for clients and stay laser-focused there. I just don’t want you to have prospective clients so confused by the options that they decide not to decide. 

For our continued example we’ll assume three items: ongoing planning with AUM, projects, and a one-time plan. Step one is to estimate the number of hours each time will include. This is client-facing time as well as the research and planning time you have to do specifically for that client. Multiply the hours for each engagement by the baseline rate we are aiming for. Here are a few examples. Your mileage may vary, as they say. Project planning may include a 1-hour meeting followed by three hours of planning and research and a 1-hour meeting to present your work. Five hours at $362 means $1810 for a project. For tidiness sake you can grab something in the $1800-2000 range. You don’t have to be exact. Similar pricing is used for the one-time plan. You may have a 90-minute hour meeting followed by 10 hours of planning and research and a 90-minute meeting to present the plan. Thirteen hours at $362 means $4706. I would recommend you go with something in the $4000-5000 range.  

The biggest pricing challenge is your ongoing work for clients. Understand there will be a bigger range here due to differing asset levels. Remember your value to the client is not always tied directly to the time at your desk. Your expertise and behavioral impact on clients is critical. I know that is a contentious issue in our industry, but I stand on the value side of the equation, not just on the butts-in-seats side. That said, you can use this information to determine where you land. Let’s assume 20 hours of work a year per household. In broad strokes, you are looking at $7000-8000. Break this out as you wish for planning vs. the AUM portion and set your AUM rates accordingly. 

Once you have your pricing, you need to determine how you want your clients to pay you. This gets right back to client service. What do they want? You don’t have to offer the same options for each engagement. Commonly for projects and one-time plans you get 50% upfront and the balance when the work is done. You can offer your clients the option of paying from cash flow or investments or even a combination. The more options you offer, the messier it will get for your billing, so I advise you to not be too flexible. Set a cadence for billing that the majority of your clients will value and go with that. 

You are in the home stretch! It’s time to stress-test those fees. Use your fee structure on some sample clients and benchmark it with 1-2% of income or whatever limitations your state may have. Research similar advisors in your area and in the market you plan to serve. You will find regional differences and differences amongst target markets. XYPN benchmarking surveys show year after year that the tighter the niche, the higher the fees. Expertise pays, so don’t be afraid to dig deep into the expertise needed for your favorite client base. 

This is not your final pricing model. The vast majority of planners shift their prices as their firms grow, as they adjust engagement styles, and learn more about how they wish to serve clients. You are just beginning your journey, so take the first step and set your pricing for success.  

Some additional resources to help you along: 

AdvicePay blogs:

How 3 Firms Successfully Structure their Pricing

AdvicePay Fee Calculator: Calculate Your Fees Quickly and Easily

For those of you who purchased passes to #XYPNLIVE in 2017, 2018, or 2019: 

#XYPNLIVE 2017: From Fees First Appointments Through Client Renewals 

#XYPNLIVE 2018: Show It, Ask For It, Earn It: Getting The Clients You Love 

#XYPNLIVE 2019: Finding Your Fee Sweet Spot: A Panel Of Three Fee Options With Arlene Moss, Ryan Cole, Emlen Miles-Mattingly, and Kaya Ladejobi 

Academy resource for XYPN members:

XYPN Academy - Benchmarking Surveys