Determining the right price point for services is often necessary for the very survival of a business. Even if price is only one of many factors that clients consider, determining fees at just the right price point is a must for any thriving business. Setting it too low erodes profits, while setting prices at too lofty a level could scare away clients.
For the first time in four years, advisors raised their asset management fees taking them back to 2004 levels, a dramatic reversal from the trend of the past three years in which advisors were providing more services and more attention without raising fees. Many advisors reported that this slide in fees caused severe fee pressure on gross profit margins. But in 2006, most (71%) reversed this trend by increasing fees and boosting profitability. In 2006, the median profit margin rose 11% to 32% over the previous year.
Advisors’ fees are based on account size, with fees decreasing as account sizes go up. If we compare how fees in 2006 stack up against fees in 2005, median asset management fees among advisors crept higher across the board for accounts of all sizes.
The key reason for increasing fees, according to almost three-quarters (74%) of advisors, is the need to be adequately compensated for all services provided. Another 26% noted that they increased fees as a result of newly added services, while 11% felt a fee change was necessary to stay in line with industry pricing. It’s interesting to note that even those who lowered their fees indicated that it was not in response to client requests.
Don’t Minimize the Importance of Minimums
The need for advisors to be more profitable in the last few years has pushed many to not only increase their fees but also to increase their firms’ minimum account size requirements. In fact, most firms (83%) have official account minimums. For the fifth year in a row, advisors were increasingly selective with their clients-accepting only those who could invest a minimum of $421,000, up 3% from the $408,000 level in 2005. More advisors determined that a higher minimum account size and fewer clients helps them maximize their existing resources and be more profitable. Many advisors feel that with a smaller client base, they can more promptly respond to clients’ needs, which translates into greater client satisfaction, loyalty and higher retention rates. However, higher minimum account requirements are not for everyone. “Increasing fees and minimum account size requirement is directly related to the maturity of the practice-as only more mature and stable businesses can employ this technique successfully. Those practices that are in a growth stage are keeping account minimums lower since there is a danger of losing client referrals. For example, the client who has $100,000 to invest and might be rejected by many advisors might refer another client who has a million dollars to invest,” points out Michael Lawrie from Denver, Colo.-based SectorQuant Capital Management.
Our statistics back up that statement. The majority of firms who increased their account minimums are more seasoned and have been in the industry for more than eight years. These veterans have found that you do not need more clients to be profitable, you just need bigger clients. Having minimums is the first step to acquiring those big clients.