New financial advisors often start with below-market fees – sometimes to build confidence that prospects will actually pay, other times to attract clients quickly and establish a base. But as the firm grows, so does an advisor’s skill set and the demands on their time. And while new clients often come in at higher fees, early clients may still be paying well below the firm’s current rates.
As such, new firms that start with low fees might make plans to raise fees quickly and, in the meantime, avoid promising clients that the fees will stay the same. But what happens when an advisor did make this promise – and now needs to increase their fees anyway? How can they handle the conversation fairly while maintaining trust with long-standing clients?
In the 159th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how to navigate the ethics and logistics of fee increases for a firm’s first clients – especially when the advisor previously promised them their fees would stay the same.
As a starting point, it’s important to acknowledge that many advisors feel a deep sense of gratitude and obligation toward their first clients. These were the people who took a chance on a new firm, often building multi-year relationships with the advisor. However, it’s worth distinguishing actual promises from emotional obligations – in some cases, advisors may feel bound to a commitment they never explicitly made.
It’s also important to consider the business impact of maintaining lower fees for early client segments. As while one or two clients paying below-market rates may not hurt the firm’s financial health, several clients for whom the advisor granted exceptions can spell trouble down the road, either by impeding the firm’s growth or the advisor’s own capacity to sustainably produce high-quality service.
If an advisor did make an explicit promise never to raise fees but now needs to do so, the best course of action would be to have a direct face-to-face conversation. Acknowledging the past promise and explaining why the fee needs to change with honesty and transparency can go a long way. The advisor may emphasize how the firm has grown, compare the client’s fees with the current market rate for financial advice, and help them understand the value of the service they’re receiving. The advisor may be surprised by how understanding many long-standing clients will be – but for clients who are unable or unwilling to adjust, the advisor may need to guide them to a firm that better fits their budget.
Ultimately, the key point is that fee adjustment conversations – especially with long-standing clients – are rarely easy but may often be necessary. By approaching the conversation with honesty, clarity, and empathy, advisors can maintain trust and fairness while ensuring their firm remains sustainable… and may even be surprised by the client’s reception. At the end of the day, charging fees that align with their value allows advisors to grow their firms and continue delivering great advice to more people!