CPA advisors continue to debate what pricing and compensation strategies best fit their culture. Advisory firms seek to find the specific method that charges clients fairly and allows them to pay simply, and in which the firm receives adequate compensation for all its services, combined with the perfect compensation structure to incentivize the best employees. In today's world, advisors speak of improvements, but not perfection.At the core of the issue is the balance between individual performance and success, and that of the overall firm. "Overly rewarding individual performance sometimes encourages hoarding of clients that limits the firm's ability to grow," says Rebecca Pomering, CPA and principal at Moss Adams Consulting Services, in Seattle, who leads the firm's compensation consulting practice. "To achieve a long-term strategy of institutionalizing the client relationship, most firms have to make dramatic changes to their compensation plans."
The decision should be based not on formulas but on the strategy for the firm. Get away from the ownership compensation model and place a number on everyone's value, says Pomering. "We see a positive trend in our surveys toward advisory firms compensating employees in a business-like way," she says. "Even smaller independents are moving up the sophistication scale to rewards based on the long-term success of the firm, rather than short-term, production-focused goals."
One firm implementing such a plan is Balasa Dinverno & Foltz LLC, of Itasca, Ill. Last year the firm began paying all professionals in the firm a quarter of the first year's fees on new clients they generate. "When we had $400 million under management, the addition of a $100 million account moved the needle of our growth," says Mark Balasa, CPA, CFP. "Now that we're over a billion in assets, we need more than just the firm's principals generating new business in order to keep growing."
Overall strategy guides the other components of compensation as well. Each professional is paid according to a market-based salary grid depending on their individual experience and the position they hold within the firm. The third piece is a bonus of up to 15 percent of compensation, awarded for both personal achievements and the firm's overall success. "The bonus is based on some things they can control, like their attitudes and client service," says Balasa. "But the amount also depends on meeting the firm's goals of profitability and client retention."
Pricing before paying
For a great number of firms, compensation strategies go hand in hand with pricing strategies. The decision about fee-only or not, and further, whether to charge a flat fee, a retainer, a percent of net worth or a percent of assets under management, forms the basis for the business strategy. While many CPAs break into the advisory business through a commission model, most established firms work on a fee basis.
"The argument still rages after the better part of a decade about the negatives of charging a fee based on assets under management," says Balasa. "I have to agree that asset-based pricing encourages the short-term focus on performance and dilutes the message we're trying to send about the value of our work on other aspects like estate and financial planning."
No pricing method is perfect. Hourly billing causes clients to question the need for each activity. Percentage-of-net-worth chargers must grapple with valuations on a variety of assets on a regular basis. CPAs charging a retainer must negotiate their worth each year with clients.
"I'm not unaware that each form of pricing has its conflicts," says Clark M. Blackman, II, CPA/PFS, CFA, CFP, of Alpha Wealth Strategies LLC, in Kingwood, Texas. "It just depends on which conflicts you choose to choose."
Blackman charges clients a percentage of assets under management. He recently established Alpha Wealth Strategies and shifted the practice from his previous employment. "I really believe a percent of assets works well," he says. "As the client's account grows, the situation demands more complicated strategies and more background research. Getting paid more as the client earns more is the strategy that most closely aligns the client's interest with that of the advisor."
That ebb and flow of the market is one reason that Pomering concludes that asset-based pricing is not the best way. As fees dropped, full-service advisors recognized that they weren't getting adequate compensation for their knowledge and skill. "For firms selling value of services, not performance, there's a big disconnect by just charging on the performance side of the portfolio," she says.
A solution is to charge fees on discrete components of the planning process, in addition to the fee on AUM. "Many say it's too confusing to separate the components, but it does help to articulate to the client what they're buying," says Pomering. "We can rebundle the services again down the road once the client population gets educated to the full menu of services they're receiving."
Many advisors acknowledge that some form of unbundling is necessary. Blackman, for instance, does a fixed fee for planning that goes beyond the standard retirement and estate planning types of strategies. The pricing of the more complex plans is the result of a lesson learned. "When I started out the firm, I tried a flat fee for the plan," says Blackman. "We charged $5,000 for the plan and put $20,000 worth of work into it, so we just wrote off the difference."
Being careful to price according to the work done, Blackman upgraded his client contract. He's very specific in the agreement about what services are included and what might be outside the quoted fee.
"I have to be careful to define what I will do for the fee, and be careful not to take on a high number of new clients who need lots of planning in addition to asset management," he says. "A planner has to be careful not to create a complex situation for themselves without an ability to charge more to cover extra work."
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