From the October 2007 issue of Investment Advisor • Subscribe!

A Shot in the Dark

Are you charging what you're worth?

How do registered representatives decide what to charge clients for their services? There are published prices for trades through various discount brokers who certainly have a place in the investment world for investors who don't want advice, but should a full-service representative base pricing for service and advice on what discount brokers charge?

Intuitively, one would say no, of course not. However, the practicalities of dealing with a demanding book of clients might lead representatives to other conclusions. When giving advice on investments as full-service reps do, what is that worth as opposed to taking orders for execution as discount brokers do? It has been cumbersome to gather the intelligence to analyze whether full-service representatives are getting paid what they are worth, relative to their peers.

Doug Trott, president and CEO of Toronto-based PriceMetrix, wants to change that. His firm provides a technology platform and consultants who analyze a rep's individual book of business relative to peers. "We help reps become better CEOs of their businesses; we focus our energies around helping them make better decisions around three things: which clients, what products, and how much? They're most often given discretion--when they're an employee--around those three, and if they're independent they of course have discretion around those three and they don't wield that discretion very well."

A strategy consultant turned CEO, Trott started PriceMetrix in 2000 after completing a project for a broker, which included looking at "all the trades that their full-service reps did, and [comparing] what they charged in commissions to what this bank-owned dealer's own discount brokerage would charge. We found that 17% of the trades that were done by the reps were done below what the discount broker would charge," Trott reports. "We thought 17% of all reps was egregiously high." It was "a symptom of a problem," Trott explains: "the reps didn't really have a reference point for what they're actually worth." Although reps could check published schedules for discount brokers' rates on the Web, he says generally they don't.

So far in the U.S., the firm has analyzed about 30 broker/dealers. PriceMetrix has seven U.S. clients out of a total of 13. During the courtship process, firms give PriceMetrix some of their transactional data, and what Trott's team has discovered is that an average of 30% of full service reps' retail trades are priced below Fidelity's basic phone trading rate. At one firm, 55% of all retail trades were done for less than Fidelity's basic [Bronze] phone rate. The "best we've seen is about 20% of a firm's trades done below the Fidelity basic phone rate," Trott notes.

The "Yeahbuts"

Trott reveals that when he approaches a broker/dealer with the firm's statistics the B/D will invariably reply "Yeah, but my guys are making it up on the other business they do!" Trott says he hasn't found that to be the case. Reps have their own set of 'Yeahbuts' to address: "Don't manage me, I know my job, I know my clients--leave me alone. Yeah, but you can't compare me to the firm because I'm not the firm. [You] can't compare me to those other reps because my clients are different. Can't compare me to that rep because he's transactional and I'm fee." Trott tells reps: "Let's compare you to reps like you, that have clients like yours, with a style of business just like yours," and then they "start running out of 'yeah, buts.'"

When PriceMetrix associates meet with an individual rep about higher revenue potential in their book, "the first thing [reps] say is 'That's wrong.' It's the normal response from any rep," Trott asserts, "'the data's wrong, you are wrong.'" But, he says, "this isn't criticism, it's just showing them where there's opportunity in the book." PriceMetrix associates show reps what has worked for other reps with similar books of business. Some of the statistics that Trott has gathered from the 6,000 reps on the PriceMetrix platform reveal surprises. Of the mainly captive reps currently on the platform, some 40% of their book consists of households with $50,000 or less in investable assets with that rep, on average only $14,000 per household with the rep, but potentially a lot more elsewhere. These accounts generate about $20 per year in revenue, according to Trott, who argues that for independent B/Ds the statistics would be much worse.

The average rep on the PriceMetrix platform generates $342 gross per hour, so "that [smaller] client is buying about four minutes of your time a year; we (and you) are pretty sure that they're consuming more than four minutes of your time a year. It doesn't mean you have to fire them, but it means you'll probably have to re-explain your proposition to them."

Some reps are afraid to discuss price with clients, Trott concedes, but "the highest-performing reps discuss how they're getting paid with their client." He tells an anecdote about a mixed foursome coming off the golf course. "One says: 'I fired my broker because he charged me what he said he was going to charge me!' [laughing]--Affluent people never do that," according to Trott. "If you've told them what you're going to charge them, and they agree, they don't fire you for charging them, they fire you if you don't do your job, or you didn't communicate with them." Trott advises reps to "price with pride," not guilt.


E-mail Senior Editor Kathleen M. McBride at kmcbride@investmentadvisor.com.

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