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Six ways to stop fee discounts eating away your profits

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by Steve Billingham on Feb 22, 2013 at 15:15

IFAs must be able to justify their fees to resist the pressure to offer discounts that could reduce profits disastrously. Steve Billingham of Steve Billingham Consulting gives six tips to help you do just that.

As the retail distribution review gets under way and clients begin to understand the transparency of adviser charging, IFAs will come under increasing pressure to reduce or discount their fees. Doing so could have a disastrous effect on profitability that may already be marginal. Depending on a firm’s gross profit margin, a relatively modest reduction in fees would require a doubling of revenue just to stand still in terms of profit.

Here are six proven tactics for defending fees and avoiding discounts too readily...

Steve Billingham is owner and director of Steve Billingham Consulting.

1. Demonstrate your value

If your clients genuinely value what you do, fees will not be an issue.

Price comes a long way down the list of client concerns when they understand and appreciate the difference you make, so it is important to make the demonstration of value your number one objective.

2. State the benefits that you deliver

When reminding clients of the tangible benefits of the service you provide, do not overlook the emotional benefits, such as peace of mind and confidence; these are enormously valuable to clients.

Ask yourslf what benefits you are delivering to clients. Recent research from the US suggests buyers of accountancy and financial services see the real benefits as:

  • working with someone they can trust
  • a different perpective that results in better decisions
  • solutions to their problems

3. Quantify the benefits financially

If you can quantify the benefits in financial terms for clients, it helps them to see the value of using your services even more clearly. If your advice has resulted in, for example, a significant saving in inheritance tax or a much lower income tax liability, this gives your fees genuine context.

Wherever possible, try to put some numbers on the financial benefits you have delivered.

4. Break your fees down

When shown as a single figure, your fees could easily look like a significant amount of money to many clients.

Break the total down so the client can establish a clear context for what they pay for. For example, an annual fee of £1,000 is the equivalent of just £2.74 per day. That is probably much less than a typical client would spend on a sandwich at lunchtime each day.

Point out to them that this concerns their future financial security and is not a hastily thrown together tuna and mayonnaise sandwich.

5. Explain what makes you different

If you look and act like every other firm in the country, you are likely to find pricing pressure particularly acute.

Ask what makes you different. How do you stand out from the crowd? Why should people choose you to advise them? Find some credible and compelling answers to those questions.

6. Be confident

Charging explicit fees will be different and challenging for many firms and it is understandable you might give in to pressure from clients. But once you agree to discount or reduce your fees, your clients will expect that from you forever. That is a slippery slope to mediocrity.

When it comes to being firm about your fees, it is essential to be confident. Believe in yourself and the difference you make. Your experience and expertise is valuable. If you do not recognise that, you will struggle to convince clients of it.

A true sign of confidence is being willing to walk away from clients who are price sensitive or who constantly haggle about the fees you charge. Clients might only be asking for a discount because they feel they should. Everyone likes to think they are getting a bargain.

The most powerful response to clients who challenge fees is to say: ‘If price is your number one criterion, we probably aren’t the right firm for you to work with.’ In our experience, around 90% of new clients will back off and accept those terms. Those who do not are probably not ideal clients.

With existing clients, it can be trickier, particularly if they generate high levels of recurring income. Use a modified version of the above response, such as: ‘We would be sorry to lose you as a client.’ This will, more often than not, result in your clients accepting what you say.

Steve Billingham is owner and director of Steve Billingham Consulting.

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