Much ink has been spilled in addressing the question of how pricing financial advice can be made ‘value-based’.
The chief objection to charging by the hour is that it appears to ignore the question of the value to the client. While the long-term benefits of a one-hour conversation could vary from client to client – and be immense in some cases – the fee remains the same.
Here are two thoughts that help to resolve the above problem.
*No one* can calculate the benefits of financial advice
Setting your fees according to the client’s perception of value is good pricing practice.
However, saying that the client should – somehow – be able to calculate the full extent of the benefits of advice is not the same thing.
Let’s recap these benefits. A truly holistic financial advisor will:
- Organize your financial life
- Define your life goals
- Solve specific problems (e.g. fund education, minimize tax)
- Grow your money to meet your goals
- Protect your money from adverse events
- Save you time
- Introduce you to other professionals
Financial advice is complex, and its benefits are so many and so path-dependent that they cannot be predicted when the customer writes a check, or any point afterwards.
Don’t believe me? Watch the video below or read Jurassic Park.
The science is in. We can’t do it, they can’t do it. It’s a bust.
The client isn’t buying – you are selling
“Selling” has bad connotations in the financial advice world for historical reasons. Nonetheless, professional advisors do have something to sell – their time and expertise.
If you are a holistic financial advisor (i.e. not a money manager or a product salesman) then your ability to make revenues correlates more or less directly with your available hours: roughly 1200 per year after vacation, overheads and other non-billable activities.
Pricing the value of an hour to you is a very simple process.
If you want to make $360k per year, your available hours are worth $300 each (360,000/1200). A client problem takes five hours to solve? Price to solve that problem = $1500.
Instead of thinking about the client ‘buying the benefits of your service’ (which is great for writing advertising copy), consider it the other way round: what would a client need to offer in order for you to devote a portion of your (finite) working hours to solve their issue?
They are buying your time with their dollars, and you are buying their dollars with your time – or selling, as it is generally known.
So where does the client come in?
It is for you to say how much you require to part with your time – and the client’s job to say if they can afford it and/or if they think you will do a good job.
The above logic doesn’t apply in industries where no solid link exists between revenue-generating capacity and time – as in the case of scalable goods. But a constrained resource like time implies a price, and it is the owner of the resource who must name it.
Coming up with an hourly fee is just the start of the journey, but without it, the journey can’t begin.
