23 – Project based fees: what are they?
A project based fee is a flat or fixed fee that is simply agreed between the client and their adviser for a given piece of work. That work may involve something discrete, such as providing a one-off investment strategy for a self managed super fund, or it may be some ongoing piece of work for which the adviser may charge an ongoing fee. For example, an adviser may charge a client $100 per month regardless of the actual tasks to be completed in any given month. In some months, the work will be greater than $100 worth; in others, it will be less. Over time, the fee needs to be adequate compensation for the business to be profitable.
This second form of pricing has much in common with a subscription model. It is often preferred as a way of creating a predictable and reliable ongoing revenue stream, along the lines of a trailing commission. Given that a sale of practice involves a purchaser buying the revenue stream, this form of billing can increase the sale price of a practice over, say, time based billings.
Proponents of project-based fees often argue that this type of pricing is best aligned with market economics. Economic rationalists would approve. Rather than using some prescriptive measure, such as an hourly fee or a FUM-based percentage, the buyer and the seller (the client and the adviser) simply agree between themselves on a price. Economics 101 states that a buyer will not agree to pay more than they think the advice is worth, and that a seller will not agree to do work for less than he or she thinks the time involved is worth. In this way, the project-based fee maximises the utility of the economic transaction: the buyer ensures that the advice adds more value than it costs, and the seller ensures that his or her time is spent in the most optimal way. This makes for the most efficient all-round outcome.
This does assume economic rationality on the part of the buyer and the seller. Given that Australians currently spend almost $700 million a year on bottled water, this might be a big assumption.