Asset-Based Colonoscopy Pricing
“The value a good financial advisor provides will usually far outweigh the cost of their service.”
I agree with that statement. Good advice can be invaluable. However, in the finance industry, “value” is often used to defend excessive and illogical fee arrangements. In that context, the value argument has little merit. For those willing to justify excessive costs by pointing to the relative value provided, I invite you to imagine a world where other, non-financial professionals share similar “value” philosophies.
Meet Dr. Price
Dr. Price performs colonoscopies. A colonoscopy examines the lining of your large intestines looking for ulcers, tumors or any other issues. For many, annual colonoscopies become routine after age 50. For most individuals, the procedure takes less than an hour and no issues are found. Occasionally, the exam might uncover health issues that prompt further action, for which the Dr. Price will refer to a specialist or order more tests. Even more rarely, a problem is discovered that could be life-threatening. For these reasons, regular colonoscopies are extremely valuable to the patient. Despite different outcomes, the work performed by Dr. Price is not appreciably different between patients, and his fee of $2,500 for the procedure reflects this.
One day, while performing a routine colonoscopy, Dr. Price discovers an early-stage form of cancer. Fortunately, the cancer is treatable. Had it not been discovered, however, the situation could have become dire. After realizing his life had been saved, the patient was moved to tears and extremely thankful for the efforts of Dr. Price.
That night, Dr. Price laid in bed thinking about the man whose life he had saved. He couldn’t help but think the value of the procedure to that particular patient was probably a lot more than $2,500. The patient was CEO of a big company and worth millions of dollars. $2,500 was a pittance for somebody that wealthy and Dr. Price felt the CEO would have happily paid him a much higher sum. Value is relative and why shouldn’t Dr. Price be compensated based on the value of his service? He wondered if there was there a better way for the cost of the procedure to reflect its true value to the patient.
One month later, after talking with his financial advisor, Dr. Price decided to change how he charges patients for colonoscopies. Going forward, the cost of a colonoscopy would be 1% of the patient’s net worth. Asset-based colonoscopy procedures meant that a patient with $100,000 in the bank would pay $1,000 for the procedure and a patient with $10 million would pay $100,000. Even at those prices, the doctor knew the value of his service far outweighed the price his patients are asked to pay.
Value vs. Equity
In terms of value, asset-based colonoscopy pricing make sense. Who wouldn’t pay 1% of their net worth to possibly save their life? It is a no-brainer. Why then, don’t doctors use asset-based pricing? Why don’t teachers, counselors, nurses, attorneys and accountants alter their pricing based on the net worth of the people they work for? One could easily argue that all of these professions produce value far greater than is reflected in the price of their services.
To a logical service provider, value delivered is only one component of pricing. The price should also be fair. A multi-millionaire may be willing to pay many multiples of what a middle-class citizen would pay for a life-saving procedure. But would it be fair for a doctor to ask that? Would that be acceptable to people or society as a whole? I have a hard time believing it would. In most professions, the fairness and sensibility of price matter just as much as value. In fact, I’d argue that the price of services is usually more closely related to the effort and cost of delivery, than to the relative value delivered to the consumer.
Last week I mentioned a financial advisor who charged his client $65,000 last year. Shockingly, this fee is not unusual for high net worth individuals. Because asset-based fees are the industry standard, most people don’t think twice about paying them. Are they fair, though? Is that type of fee reflective of the work being done? How much time do you think the advisor is spending on the client to justify a $65,000 fee? For some context, the hourly billing rate for financial advisors tends to be around $200 per hour. If we assume the average rate, do you think the advisor who collected a $65,000 fee spent 325 hours doing work for his client last year?
“With great power, comes great responsibility.”
Skilled professionals should think carefully about how they price their services. Good financial advice is extremely valuable but should be priced logically, and appropriately. People appreciate logical, fair and candid pricing. They deserve it. Next time you hear an advisor try to justify excessive fees by talking about the value they are providing, recite the parable of Dr. Price and Asset-Based Colonoscopies. This industry won’t change on its own. The onus is on consumers to demand something better.