Being in business is pretty simple really. We want to deliver the very best financial planning, advice and investment management services, and we want to do that in a sustainable and compliant fashion.
Unsurprisingly, we incur business costs in doing this, so we also want to do it profitably. If we are to succeed in our endeavour we need to consistently produce more revenue than we actually spend. The concept of profit may seem alien to some who are not in business. They may be working for an organisation funded by taxpayers’ money, for example, or by compulsory levies imposed on people.
To succeed we must price our services at such a level that our costs are covered, that we are capitally adequate (essential as an authorised and regulated firm) and that we can invest in our business to continually improve delivery to clients.
We must also price accordingly to pay our shareholders (in our case, all of whom work in the business) for the risks they are taking, as well as for the work that they do.
We cannot ignore the fact we must also price at such a level that consumers find it an attractive enough prospect to delegate the work they do not have the time, skill or inclination to do for themselves to us. If we price properly we can achieve all of the above.
Advice firms then have to make important decisions about their pricing mechanism. It simply does not matter if that pricing is based on an hourly rate, a fixed fee or a percentage of assets charge. That choice is a commercial decision made by the business owner.
As long as it is communicated to the consumer in a transparent fashion compliant with the regulatory rules, any pricing approach is acceptable. Ultimately, it is then up to the consumer to decide. Where such charges are “hidden” that then creates a problem for both consumer and business.
I accept, by the way, that consumers have a real challenge in defining what is a competitive price or not. There are really very few reference points to help them determine what is good, bad or indifferent when it comes to price.
“As long as it is communicated to the consumer in a transparent fashion compliant with the regulatory rules, any pricing approach is acceptable.”
There has recently been some debate around “decency limits”, with particular reference to the charges imposed for ongoing services. Some extreme examples have been quoted.
In practice, it is for each firm to determine what a decency limit looks like. In my experience many take this into account in their pricing policy, perhaps by reducing the level of charge when a client’s invested assets exceed a certain level.
I always end up back at my simple equation: price equals cost plus profit. With this in mind, surely each firm must have a different pricing level? One that is right for both them and their clients. If not, what is the point of being in business?
Nick Bamford is executive director at Informed Choice