Research and consulting firm PriceMetrix is out with a new report that finds a direct correlation between offering fee-based accounts and services and increased revenue growth.
The study, released in the Canada-based company’s August newsletter, finds that advisors who increased their assets in fee-based accounts by 25 percentage points or more have seen revenue growth of 47% over three years, more than double the average growth rate of 21%. This compared to a revenue growth of 19% for advisors who increased their assets in fee-based accounts by less than five percentage points in the same period.
The company also found:
- In the past three years alone, the percentage of industry assets in fee-based accounts has grown from 21% to 28%.
- There are few "purely fee" or "purely transactional" advisors—almost all books contain both;
- Increasingly, individual clients are choosing to hold both kinds of accounts;
- An increase in fee asset concentration of an advisor’s book leads to an increase in the overall return on assets;
- The pace at which advisors choose to transition their books to fee varies widely;
- The pace at which advisors choose to transition has a meaningful impact on results, not only in terms of asset and revenue growth, but also in terms of the quality of the overall book.
The results appear to track with numbers reported by independent broker-dealers who participated in Investment Advisor’s 2012 Broker-Dealer Presidents’ Poll in June. Total fee-based revenue of the 70 broker-dealers included in the survey rose by 36% over the past three years, from $3.9 billion in 2009, to $6.1 billion at the end of 2011.
PriceMetrix notes that 91% of advisors in the North American retail wealth management industry have at least one fee account in their book of business. Yet it goes on to note that while fee-based accounts are increasingly a part of everyday life, few advisors have completely abandoned the transactional model; only 1% of advisors have 90% or more of their assets in fee accounts.
“Although advisors often think of themselves as having a ‘fee-based’ or ‘transactional’ book, the truth is, most have (at least a little of) both,” according to the report's authors. “That said, the trend towards higher concentrations of fee-based assets shows little sign of abating, and as the market for fee-based products matures, both clients and firms are demanding that advisors offer a breadth of products and services to satisfy a wide variety of client objectives.”
Investors, for their part, are catching on to the model as well, and appear to be willing to pay a premium for fee programs. PriceMetrix argues fee-based models tend to command higher revenue on assets because they force the advisor to define and clarify the value proposition that will be delivered.
“The average fee-based account is 46% larger than the average transactional account and generates revenue that is more than three times higher." the authors said. "Households that have one or more fee accounts generate an ROA that is 40 to 70 basis points higher, regardless of household size, than households that are purely transactional, across all household sizes examined."