It was 2007. It was snowing.
If you've ever been to Amsterdam in the snow, you'll know it's a magical place. Lots of time in warm bars drinking tall glasses of beer, eating pickled herring, and just generally wandering around what is a beautiful city.
But something got us that New Year's Eve. A madness that drove us to go out and spend 900 euros each on shoes, cameras, and fancy dress costumes.
900 euros is a lot of money at the best of time, But when you're backpacking it's even more.
Not quite sure how it happened, but it did and one of the purchases that ended up in my battered backpack was a pair of Hugo Boss black boots.
I remember them, mostly because I still have them, also because they cost 300 Euros. But the value I've got from this pair of shoes has far exceeded the significant outlay at the time.
Well, first because they lasted. Despite many repairs, they still look good and as a result, the future value of the purchase exceeded my expectations or understanding of what I was paying for at the time. They've been the boots that keep on giving.
Secondly, because I feel great when I'm wearing them. They're a smart pair of shoes but certainly and most importantly, is the intangible feeling I get when I see them. And it reminds me of that trip.
It's also a reminder to me that sometimes value is a more important measure of worth than cost.
By the time you read this, I will have run a workshop called the Excelerator. I run three a year. One of the sessions I ran was called the Pricing Paradigm and one of the concepts I spoke about was price versus cost versus value. And it's super, super topical right now!
Recently I had a discussion with someone with a legal background about advice fees, and one concept discussed was about any work done for clients had to be traced back to the hourly cost and the amount of hours to deliver the work.
I get that there should be some sort of moderation of fees. After all, there is a thing or two to be said about charging fair value, and my take on it is anything which is excessive, which also detracts from the client's ability to achieve the goals, is far from ideal.
However, I also believe that there is a fundamental misunderstanding that many traditionally hourly based internet industries have about the way advice should be charged for.
The first problem I have with the hourly right model is it discourages contact.
A family member of mine has recently spent the last two years engaging numerous lawyers to try to resolve a troubled business situation. It's in the lawyers' interests, ethics aside, for them to use as much time as possible. They get paid more. Now, I'm sure these are ethical lawyers, but at the end of the day, this family member has spent many, many, many thousands of dollars without any clear outcome.
I'd imagine you want your client to pick up the phone and let you know in advance of any financial decisions that may need to be made. A preemptive strike if you like, asking the 'what if' question before something becomes a reality.
Now imagine from the client's perspective...
The cost of that call is going to be billed back to you in six-minute increments. If it's not a question which it's clear requires advice, most people are going to try and work it out themselves.
That's the problem with hourly rates when we're talking about future-focused advice. Ultimately, the cost of engaging someone to ask even a simple question can often prohibit contact.
But that's just part one. Here's the big thing.
It was during the conversation I was telling you about with my friend with the legal background, that I pulled out my iPad Pro and started drawing pictures.
I drew a picture of what most of you will know as the 'path from now to retirement' and the choice of three outcomes.
The first outcome is what most people are on track to get. It's what you get when you end up with when you reach retirement day with no real plan. It's the bare minimum. Let's put a number on it. Let's say that's the $1 million outcome.
The second outcome is the one that we need. It's an amount of money you need to retire, enjoy a good lifestyle and ensure your money lasts at least until the expected length of your life. Let's call a good outcome.
There's a third outcome. It's when you reach retirement having enjoyed a full life, and knowing that not only do you have enough money to fuel your lifestyle in retirement, but also not have to worry too much about it reducing the capital value of your estate. In essence, all the hard work you've done fuels the lifestyle for you and leaves a legacy beyond. Let's say that number is $3 million.
The first choice everybody needs to make is which outcome they'd like to go for. Choosing is the start of a financial plan. Ultimately, procrastination is not a choice and as you would well know, the best thing to do is anything preferably early, however small.
Given the opportunity, most people will choose the $3 million choice, right? Which means the scale of the gap that's needs to be addressed should be obvious.
The difference between the current outcome and the desired outcome is a $2 million problem to solve.
That problem can be solved through;
- smart financial strategies,
- savings and cash flow management,
- taxation savings,
- good investments, and
- various other strategies which ultimately will increase wealth and make sure that things are managed optimally.
And the timeframe is 20 years
By the way, you're not guaranteeing the solution. You can't control the next 20 years any more than you can the weather, but you can help better than most people can help themselves.
That's what the plan you're going to create is designed to help do.
And it's your support along the way once the plans are in place, which will increase the likelihood of getting there.
So if you're solving a $2 million problem for client over the course of 20 years what's that worth? Should that be measured by the number of hours of work put in? Should it be measured by an arbitrary hourly rate?
No, I don't believe it should.
You see if you look at the wide spectrum of most financial experts, traditionally most of them had been remunerated in a way that is potentially conflicted in the wrong hands
- The more you borrow through your mortgage broker, the more they get paid.
- The more hours your accountant puts in, the more they get paid.
- Ditto your lawyer and numerous others.
But how about that financial adviser charges you a set rate?
That number may not represent the number of hours. It may be charged based on the complexity of your situation, the desired outcome, leveraging certain services and expertise as needed
.And frankly, it might simply be a reflective of how you see the value of what you do in terms of the outcome you will create.
So, if the $2 million outcome for the client is achieved in 20 years, what percentage of that is okay to go to the adviser?
In my mind, I don't think any adviser should be working with a client if they can't create five times value for that client.
In other words, the output that the strategies together are designed to achieve should be your rate times five. That's the bare minimum.
Let's take it to the next level and up the game. What if we say that we should all aim, for 10x value? How about 20x?
5x value means charging a total of $400k over those 20 years, or $20k per year.
10x means $10k a year.
20x comes in at $5k per year.
And that puts us in a very nice $5,000 a year fee over 20 years.
Suddenly, advice fees don't seem so unreasonable.
But what's $5k a year in terms of hours?
Well, if we use $200 an hour that would mean that as an adviser, you would need to demonstrate that you have worked for 25 hours over the course of 12 months.
Or maybe if you charge $10,000 Does that mean you have to work for 50 hours over the 12 months?
Or maybe you charged $20,000 and you work for 100 hours?.
But what if I'm so good at my job, so experienced, so capable, so specialised, that I can do in 25 hours worth what someone else takes 100 hours and still achieve for you that $2 million outcome?
Therein lies the fault in the sky right now.
Pricing is such a huge part of any business and a huge part of Advice businesses. There's no doubt that history in our industry has examples where pricing wasn't right, whether as a percentage of this or a percentage of that, the fee as a quantum was out of whack with the value delivered.
However, it concerns me.
Right now, we have a regulator apply value measures to the work done by financial advisers using legal models.
Judging people's ability to help clients achieve outcomes with very little actual understanding in most cases of what that value is.
For you as a business, this is a time to be prepared to answer with strength and confidence.
- What's in your service of the work you do for people?
- How did you come up with the rates?
- Why is the work you are recommending this (in their best interests)?
However, I also think it's a time to be confident and realise that soon, very soon this will pass.
It's those who understand that the value of advice isn't about the how's but rather about the outcomes. They're the ones that will win.