Clients might not agree, but there's rising evidence that advisors are not charging enough for their services.

According to Pricing Strategies for Maximum Success, a study Moss Adams executed for Schwab Institutional, most firms don't analyze their pricing schedules when establishing fees for a new client or when considering changes to their business model. This lack of self-examination often comes back to bite advisors in the form of underpriced advisory services.

“The issue is that advisors have two forces of evil conspiring against them: clients want more for the same fee and costs are rising,” says Mark Tibergien, a principal with Moss Adams and author of the report. “To restore profitability, advisors need to either change their approach to pricing or increase prices,” he says.

When you're doing your annual practice evaluation, Tibergien says advisors need to do some basic assessments:

  • Cost of serving the client: Perhaps, most obviously, pricing must reflect the cost of service. For example, a firm with 200 clients, overhead of $400,000 and professional compensation of $600,000 would have an average cost per client of $5,000 ($1,000,000 / 200 = $5,000). A new relationship would have to contribute at least $5,000 in revenue to break even. Get rid of the ones that don't at least break even.

  • Competition: Pricing strategy must be developed with competitors' prices in mind (obviously, price is a significant part of a prospect's decision to work with one advisor over another). Check out ADV forms of competitors. Are you above, below or in-line with the competition's pricing?

  • Value Proposition: Prices must be aligned with the value advisors deliver to clients. If clients perceive that an advisor's contribution to their financial lives is as great, or significantly greater, than the price they pay to the advisors, they will be satisfied with the fee.

Tibergien says the report is not meant to suggest advisors spend every spare moment calculating profitability. Still, he says, they need to be aware of factors affecting margins, especially given the environment of rising costs and demands from clients. “You wouldn't wing it with your client's financial plan, why would you do it with your business?” asks Tibergien.