Business income is the thing that keeps the lights on and the doors open. It pays for staff wages and it enables good advice outcomes for clients.
The FASEA code coming into play in the near future mandates some important pricing considerations. This is why every financial planning business needs a pricing policy.
Standard 7 states:
“The client must give free and informed consent to all benefits you and your principal will receive in connection with acting for the client, including any fees for services that may be charged. If required in the case of an existing client, the consent should be obtained as soon as practicable after this Code commences.
Except where expressly permitted by the Corporations Act 2001, you may not receive any benefits, in connection with action for a client, that derive from a third party other than your principal.
You must satisfy yourself that any fees and charges that the current client must pay to you or your principal receive, in connection with acting for the client are fair and reasonable and represent value for money for the client.”
Source: FASEA Code of Ethics, p7.
What is a pricing policy?
A pricing policy provides staff with a systematic and repeatable process to pricing decisions. Essentially it is a philosophy or process that’s designed to influence and guide pricing decisions. Pricing policy sets the guideline or process to achieve a business’s pricing objectives.
It’s particularly important for a profession like financial planning because of customisation and judgement that a planner brings to their client’s needs and situation. While some clients might be the similar, no two clients will ever be exactly the same. So how does your business charge for advice and will you meet the expectations set by Standard 7?
Factors to consider
In creating a pricing policy, you need to consider your pricing strategy:
- Cost Plus pricing strategy – the most basic pricing strategy which is underpinned by your costs. The plus becomes the margin seek.
- Hourly rate pricing strategy – this is commonly used by professional advisers of all kinds. The provider charges an hourly rate for time spent.
- Project-Based pricing strategy – this approach charges a flat fee per project, rather than money for time.
- Price Lining strategy – this approach is like a project based pricing, but it creates guidelines for pricing for different kinds of activities/lines, perhaps within one client relationship. Not all activities/lines are priced the same, some are high, medium and lower priced, depending on what’s involved.
- Competitor pricing or a penetration pricing strategy – this seeks to under-cut your competition to increase your market share.
- Premium pricing or a luxury pricing strategy – this seeks to increase the cost compared to your competition, appealing to an emotional need to be with the best, of which price is a factor.
- Skimming pricing strategy – this is where the highest possible price is charged initially and then is lowered overtime. This often occurs with technology and innovation. Remember the cost of a new DVD back in the day?
- Demand pricing strategy – this occurs that during peak times, more is charged. It’s one way to try and slow demand. An example is Uber charging more on New Year’s Eve.
- Discounting strategy – this occurs often during non-peak times. When demand is low, less is charged in an effort to stimulate demand during that period.
- A mixed approach of one or more of the above strategies.
Which one is right?
Well that depends on the kind of your business you operate or wish to operate. I think it’s important to realise that price isn’t just a function of costs. There are other things to consider, including maintaining profitability and the longevity of your business. Certainly these things are important for your clients too – they want you to be around in the future, not just the here and now.
Shades of grey don’t help anyone, except those arguing a point of law
The biggest area of uncertainty I believe in regard to establishing a pricing strategy that meets Standard 7, relates to the part that charges and fees “are fair and reasonable and represent value for money for the client”.
‘Fair and reasonable’ is open to legal interpretation and from my reading, I can’t see a solid black or white answer. Additionally, it also depends on client perceptions which are going to be different from client to client. It does however involve ideas of not being unfair or inequitable, having balance, value, justification, impartiality and consistency. See this link for more info. That’s one of the challenges of a code of ethics, right and wrong may ultimately depend on what is argued within a court of law. Hopefully this code doesn’t create a lawyers picnic.
A premium pricing strategy therefore may still be fair and reasonable, even though your prices are higher than your competitors and provided it meets the additional pricing aspects of the Standards around free and informed consent.
A pricing policy provides clarity to everyone
A documented pricing policy shows that you treat clients fairly and with consideration. Many financial planning firms might have components of their pricing strategy documented, but now might be a good time to review and formally document your approach to pricing and give your staff and advisers more certainty in a new regulatory environment. It will also be useful to demonstrate you’re meeting the new FASEA code, should someone ask.