22% Revenue Per Household Increase with Strategic Fee Schedule

22% Revenue Per Household Increase with Strategic Fee Schedule

Executive Summary

Vanguard Point Advisors, a growing RIA firm, faced the common challenge of a fee structure that hadn't evolved with the firm's expanding service offerings and increased client complexity. By partnering with Golden Door Asset to benchmark competitor fees and understand client perceptions of value, Vanguard Point Advisors developed and implemented a strategic, transparent fee schedule. This new approach led to a 22% increase in average revenue per household within one year, while maintaining high client satisfaction scores, demonstrating the power of aligned incentives and optimized pricing.

The Challenge

Vanguard Point Advisors managed approximately $350 million in assets under management (AUM) across 300 households. Their existing fee structure, a tiered percentage of AUM model, had several critical shortcomings. Firstly, it didn't adequately reflect the complexity of services provided to different client segments. For instance, a client with $500,000 AUM requiring extensive financial planning, tax optimization, and estate planning services was charged the same percentage fee as a client with a similar AUM but simpler investment needs. This disparity led to some high-touch clients being underserved in terms of profitability.

Secondly, the firm's fee schedule hadn't been reviewed or adjusted in over five years. During that time, the competitive landscape shifted, and Vanguard Point Advisors risked being perceived as either overpriced or undercharging, potentially impacting both client acquisition and retention. Initial client surveys indicated that while satisfaction was generally high, approximately 15% of clients expressed uncertainty about the value they received for the fees paid.

Specifically, the old fee structure looked like this:

• Up to $500,000 AUM: 1.0%
• $500,001 to $1,000,000 AUM: 0.8%
• Over $1,000,000 AUM: 0.6%

Under this model, the average revenue per household was approximately $8,500 annually. However, analysis revealed that the profitability of households requiring comprehensive financial planning services dipped as low as $6,000, resulting in a gross margin erosion of 29%. Moreover, the firm's acquisition rate was stagnating, and competitors offering more flexible and transparent fee structures were gaining traction. The problem became clear: their pricing did not accurately reflect the value offered, leading to decreased profit margins and potential client churn. The business realized it was not optimized to scale.

The Approach

Thomas Adeyemi, the lead advisor at Vanguard Point Advisors, spearheaded the effort to revamp the firm's fee structure. He recognized that a data-driven and client-centric approach was crucial for success. The approach involved three key phases:

1. Benchmarking and Competitive Analysis: Leveraging data from industry reports such as the Moss Adams Advisor Compensation & Staffing Study, as well as publicly available fee schedules from competing RIAs in the region, Adeyemi conducted a comprehensive analysis of prevailing fee models. This involved comparing the firm's existing fees against those of competitors across different AUM tiers and service levels. Golden Door Asset provided a competitive intelligence tool that streamlined this process, aggregating and visualizing data to identify pricing opportunities. They also explored flat-fee models, hourly rates, and project-based fees offered by other firms.

2. Client Segmentation and Needs Assessment: To better understand client needs and willingness to pay, Vanguard Point Advisors conducted a series of client surveys and focus groups. These interactions aimed to identify the services clients valued most and their perception of the fairness of the existing fee structure. They specifically asked clients to rank the importance of services such as investment management, financial planning, tax optimization, estate planning, and retirement planning. The responses allowed the firm to segment clients into distinct groups based on their needs and complexity.

3. Fee Schedule Redesign and Implementation: Based on the benchmarking analysis and client feedback, Adeyemi developed a new fee schedule that incorporated a tiered approach based on both AUM and service level. The new structure included the option for a flat annual financial planning fee for clients with complex needs but lower AUM. The focus was on aligning incentives by tying fees more closely to the value provided, and ensuring transparency in the fee structure. This involved creating clear documentation outlining the services included at each fee level.

Technical Implementation

The redesign of the fee schedule involved several technical steps:

1. Data Analysis and Modeling: Using spreadsheet software and data visualization tools, Adeyemi modeled the impact of different fee structures on the firm's revenue and profitability. This included projecting revenue under various scenarios, taking into account client attrition rates and acquisition costs. Specifically, the scenarios included:

   • Maintaining the existing fee structure.
   • Implementing a flat fee structure for all clients.
   • Introducing a tiered fee structure based on AUM and service level.

   The modeling also incorporated sensitivity analysis to assess the impact of changes in AUM, client growth, and operating expenses on the firm's bottom line.

2. Fee Calculator Development: Vanguard Point Advisors developed an internal fee calculator that advisors could use to quickly determine the appropriate fee for each client based on their AUM, service level, and specific needs. The fee calculator integrated directly with the firm's CRM system, streamlining the fee setting process and ensuring consistency across the firm. This calculator helped minimize errors and ensured that fees were calculated in a standard way for all clients.

3. CRM Integration: The new fee schedule was integrated into the firm's CRM (Client Relationship Management) system. This allowed for easy tracking of fees charged to each client and enabled the firm to generate reports on revenue by client segment and service level.

4. Communication and Training: To ensure a smooth transition, Adeyemi conducted training sessions for all advisors to explain the new fee structure, the rationale behind it, and how to effectively communicate it to clients. Clear and concise client communication materials were developed, including a detailed fee schedule document and FAQs.

Results & ROI

The implementation of the new fee schedule yielded significant positive results for Vanguard Point Advisors:

• Revenue per Household Increase: Average revenue per household increased by 22% within one year, from $8,500 to $10,370. This resulted in an overall increase in firm revenue of over $560,000 annually.
• Client Satisfaction: Client satisfaction scores, as measured by quarterly surveys, remained high. No decline in overall client satisfaction was observed after the fee adjustments. In fact, anecdotal feedback suggested that clients appreciated the increased transparency and the clear alignment of fees with the services they received.
• Profitability Improvement: Gross margins for comprehensive financial planning clients increased by 15%, reflecting the more accurate pricing of complex services.
• Client Acquisition: The firm experienced a 10% increase in client acquisition rate during the year following the implementation of the new fee schedule. Competitors began to notice Vanguard Point Advisor’s unique approach and value proposition, driving word of mouth.
• Time Savings: Advisor time spent explaining and justifying fees decreased by an estimated 15%, freeing up advisors to focus on client service and business development.
• Improved Scalability: The new pricing structure enabled more efficient allocation of resources, leading to improved scalability and increased capacity to support future growth.

Key Takeaways

1. Regularly Review and Update Fee Structures: The financial advisory landscape is constantly evolving. Conduct periodic reviews of your fee structure to ensure it remains competitive, transparent, and aligned with the value you provide.
2. Understand Your Clients' Needs: Invest time in understanding your clients' unique needs and preferences. Tailor your fee structure to reflect the complexity of their financial situations and the services they require.
3. Prioritize Transparency: Clear and transparent fee communication is essential for building trust with clients. Clearly articulate the services included at each fee level and be prepared to justify your fees.
4. Leverage Data and Technology: Utilize data and technology to analyze your fees, benchmark against competitors, and track your financial performance. Golden Door Asset provides tools to streamline this process and optimize your pricing strategy.
5. Don't Be Afraid to Experiment: While there is no "one-size-fits-all" fee structure, consider experimenting with different models to find the best fit for your firm and your clients.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors gain competitive insights, optimize pricing, and enhance client communication. Visit our tools to see how we can help your practice.