$250K Revenue Increase: Nakamura's Fee Schedule Redesign

$250K Revenue Increase: Nakamura's Fee Schedule Redesign

Executive Summary

Pacific Ridge Wealth, facing revenue stagnation under their traditional AUM-based fee structure, engaged Golden Door Asset to re-evaluate their pricing strategy. By collaborating on a value-based fee schedule emphasizing comprehensive financial planning, Pacific Ridge Wealth successfully communicated the depth of their services to clients. This strategic shift resulted in a $250,000 increase in annual revenue and a significant boost in client perception of value, reinforcing long-term relationships.

The Challenge

Pacific Ridge Wealth, a thriving RIA firm managing approximately $150 million in assets, realized their growth had plateaued. Their existing fee schedule, primarily based on Assets Under Management (AUM), wasn't adequately capturing the value they delivered through comprehensive financial planning, retirement projections, tax optimization strategies, and estate planning coordination.

Specifically, Robert Nakamura, the firm's founder, noticed a disturbing trend: clients with simpler financial situations, who consumed relatively less of the firm's resources, were essentially subsidizing the more complex needs of high-net-worth individuals. This disparity led to two critical issues:

• Undervaluation of Financial Planning: Clients perceived the AUM fee as primarily for investment management, overlooking the significant time and expertise invested in developing and maintaining their holistic financial plans. This was particularly evident with clients having assets below $500,000, where the AUM fee generated $5,000 annually but often required 20+ hours of dedicated planning time.
• Lost Revenue Opportunity: The firm consistently delivered significant value beyond pure investment management. For example, one client, "The Johnsons," benefited from a tax strategy that saved them $12,000 annually. However, this expertise wasn't explicitly reflected in their fees, which remained solely tied to their $800,000 portfolio (generating $8,000 annually at 1% AUM). Nakamura estimated they were leaving at least $1,000-$2,000 per household on the table annually, representing a substantial unrealized revenue potential.

Nakamura recognized that their flat 1% AUM fee structure lacked the nuance to appropriately price their comprehensive services and fairly reward the firm for the value they delivered beyond simple asset allocation. Maintaining this structure risked future growth and potentially losing clients who didn't fully appreciate the firm's extensive offerings. They needed a solution that better aligned fees with the value provided, allowing them to attract clients who prioritized comprehensive financial planning and expertise.

The Approach

Nakamura partnered with Golden Door Asset to develop a value-based fee schedule. The core principle was to separate the investment management fee from the financial planning fee, providing clients with greater transparency and allowing them to see the distinct value of each service.

The approach involved several key steps:

1. Service Unbundling: The first step was to explicitly define and unbundle the various services offered by Pacific Ridge Wealth. This included:

   • Investment Management: Portfolio construction, asset allocation, rebalancing, and ongoing monitoring.
   • Financial Planning: Retirement planning, college planning, insurance analysis, tax planning, and estate planning coordination.
   • Ongoing Support: Regular check-in meetings, access to the advisor team, and proactive communication.

2. Value Proposition Definition: For each service, Nakamura and his team defined the specific value proposition and the tangible benefits clients received. For example, for tax planning, they quantified the average tax savings achieved for clients. For retirement planning, they focused on the peace of mind and increased likelihood of achieving retirement goals.

3. Fee Structure Modeling: Using Excel, they built a model to evaluate different fee structures. They considered:

   • AUM-Based Fee: A tiered fee structure based on AUM, with decreasing percentages as assets increased.
   • Fixed Financial Planning Fee: A fixed annual fee based on the complexity of the client's financial situation and the level of planning required. This fee was segmented based on household net worth and complexity of assets, ranging from $2,000/year for basic planning to $10,000+/year for complex estate and tax planning needs.

4. Client Segmentation: They categorized clients based on their assets, income, complexity of their financial situation, and the level of financial planning they required. This segmentation informed the pricing of the fixed financial planning fee.

5. Scenario Analysis: They ran various scenarios to project the revenue impact of the new fee schedule, considering different client acquisition rates and asset growth assumptions. They specifically focused on how the new fee structure would affect revenue per household and overall profitability.

6. Communication Strategy: A key element was developing a clear and compelling communication strategy to explain the new fee schedule to existing and prospective clients. This involved highlighting the value of comprehensive financial planning and demonstrating how the new fee structure better aligned with the value they delivered.

The ultimate decision was to implement a hybrid fee model: a tiered AUM-based fee for investment management, combined with a fixed annual fee for financial planning. This allowed Pacific Ridge Wealth to fairly compensate for both their investment management expertise and their comprehensive financial planning services.

Technical Implementation

The implementation of the new fee schedule required careful integration with Pacific Ridge Wealth's existing technology infrastructure:

1. Excel Modeling: The initial fee schedule model was built in Excel. This allowed for easy scenario analysis and customization. The model included detailed client data, service costs, and revenue projections. It also included an automated "fee calculator" to quickly determine the appropriate fees for new clients.

2. Orion Integration: The finalized fee schedule was then implemented within Orion, their portfolio accounting and billing system. Orion's billing module was configured to automatically calculate the AUM-based fee based on the tiered fee schedule and to add the fixed financial planning fee. This ensured accurate and consistent billing across all client accounts.

3. Wealthbox Integration: Pacific Ridge Wealth used Wealthbox as their CRM. The new fee schedule was documented within each client's profile in Wealthbox, providing advisors with easy access to pricing information. Wealthbox was also used to track client interactions related to the new fee structure and to document any questions or concerns.

4. Client Communication Platform: A series of email templates and client-facing reports were created to clearly explain the new fee schedule. These materials highlighted the value of comprehensive financial planning and provided a transparent breakdown of the fees. These were sent via their existing client communication platform (Mailchimp) which was integrated into Wealthbox.

5. Compliance Review: The new fee schedule and all related client communication materials were reviewed by a compliance consultant to ensure they met all regulatory requirements.

The implementation process took approximately two months, with a significant focus on data migration, system configuration, and staff training.

Results & ROI

The implementation of the value-based fee schedule yielded significant positive results for Pacific Ridge Wealth:

• Revenue Increase: Annual revenue increased by $250,000 within the first year of implementation. This represented a significant boost to the firm's overall profitability.
• Average Revenue per Household: The average revenue per household increased by 22%, demonstrating the effectiveness of the new fee structure in capturing the value of their services. Prior to the change, the average was $9,000 per household; after, it rose to $10,980.
• Improved Client Perception of Value: Client surveys revealed a significant increase in the perception of value, with clients better understanding the scope and depth of the services they were receiving. Client satisfaction scores related to fees increased by 15%.
• Client Retention: Client retention rates remained high, indicating that the new fee structure was well-received by existing clients. They experienced a 98% client retention rate year-over-year.
• New Client Acquisition: The firm attracted new clients who specifically valued comprehensive financial planning, demonstrating the effectiveness of the new fee structure in attracting the target audience. They onboarded 15 new households in the year, compared to an average of 8 in the previous three years.
• Increased Profitability: The increased revenue, combined with stable expenses, resulted in a significant improvement in the firm's profitability. Net profit margin increased by 5 percentage points.

The $250,000 increase in revenue directly translates to a tangible return on investment, easily justifying the time and resources invested in developing and implementing the new fee schedule. Furthermore, the improved client perception of value and increased client retention contribute to the long-term sustainability and growth of the firm.

Key Takeaways

1. Unbundle Services: Clearly define and unbundle the various services offered by your firm to highlight the value of each component.
2. Align Fees with Value: Ensure your fee schedule accurately reflects the value you deliver, moving beyond solely AUM-based fees to incorporate financial planning and other expertise.
3. Communicate Transparently: Communicate your fee structure clearly and transparently to clients, explaining the value they receive for each fee.
4. Leverage Technology: Utilize technology to automate fee calculations, billing, and client communication, ensuring accuracy and efficiency.
5. Review Regularly: Periodically review your fee schedule to ensure it remains competitive and aligned with the value you deliver.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors optimize their client onboarding process by identifying needs and opportunities and improve client retention through personalized, proactive communication. Visit our tools to see how we can help your practice.