Much ado about fees (part 1 of 3)

This week we are taking a slight departure from the client side and looking more closely at the advisor’s side (accountant, lawyer, management consultant, engineer etc …) when it comes to the wonderful topic of fees.

As we all know there are few different types of fee regimes.

1. Success -based

There are lots of clients out there who, for whatever reason, would prefer to pay out of their gain rather than pay fees up front for a project or a certain outcome.  The problem with that is that clients would probably do more with their advisors if there could be some element of the fees being charged based on a success basis.

Many advisers don’t like doing that purely because of the fact that they increase their risk.  However, consider some of the advantages of charging clients a success fee only:

Advantages

a.  Getting more work.

b. Building confidence and trust with the client, because of the fact that the advisor has been prepared to back themselves, or take skin in the game, or have a stake.  Clients like that because in effect the advisor is sharing the pain with the client.

c. Fees can be actually higher than normally charged, since if a project is successful then the client is prepared to pay more because it’s out of their gain. For example, if the project is a sale of an asset and the success fee is based upon that asset reaching a certain price and the advisor is able to exceed that price expectation, then of course the client is prepared – and has the capacity – to pay more.  Of course the size of the premium depends upon a range of factors: the agreement that you have with your client and the quality/strength of the relationship.

Disadvantages

a. Sometimes you may not get paid.  If the fee for the project is success only, then you can put in a lot of time, effort and resources and not have anything to show for it. Not a good outcome.

b. Even though a success fee is charged and you’ve delivered the client a great outcome, sometimes clients want to balk on agreements. Although the project was so incredibly well-delivered and the client has made a huge gain, they may backtrack and not want to pay that big fee.  This can sometimes happen when expectations of both parties and the client-advisor relationship is not strong.

c. In some respects a success fee only regime may lower the quality of the work that the advisor actually delivers to the client.  This is especially the case when the usual mode for the advisor is to charge fees for time or to charge their fees on a retainer basis.  Now, if the advisor has other clients that are paying him/her up front or on a part basis when stage one of a project is delivered, then stage two and so on, then depending on the mindset of the advisor, he/she may lean towards those clients that are prepared to part with cash up front as opposed to the success only piece.  So, sometimes from a client’s point of view, they’re not getting the best from the advisor.  It really depends upon the type of advice, the area of specialty, and the relationship between the client and the advisor.

We’ll visit another fee type next post.

All my best,

James E