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.
On the flip side, the minority of firms (21%) who have either lowered or maintained their fees tend to have lower account sizes and post lower profit margins, as the table below shows. This makes sense-smaller clients generate lower revenues, while consuming a comparable amount of expenses (in terms of time and resources) as the bigger clients.
You’re Worth It
One of the most important takeaways from examining fee changes by advisors is that, as stated above, even when advisors lower their fees, it is NOT in response to client requests. This is an important point to make-pricing is likely not a key reason for a client choosing to work with you. In fact, most (88%) advisors believe that trustworthiness is the most important element of a client-advisor relationship. Seventy-two percent of advisors believe that personal rapport is the reason clients chose them, while 66% named the ability to understand needs as most important when making that decision. So don’t hold back on a slight fee increase to maintain comparable profitability with the industry. Explain any slight fee changes to your clients in terms of the value and services they get from you. After all, you’re worth it.
Maya Ivanova is a research manager with Rydex AdvisorBenchmarking.com. She can be reached at email@example.com.
Rydex AdvisorBenchmarking is a free practice management service that enables advisors to compare their practices to those of other advisors in the industry. Data used in this article is from AdvisorBenchmarking’s Annual Study of the RIA Marketplace, July 2007, based on surveys of 912 RIA firms.
Rydex AdvisorBenchmarking, an affiliate of Rydex Investments
AdvisorBenchmarking is a free practice management program designed to help RIAs better manage and grow their firms.
The analysis on Rydex AdvisorBenchmarking.com is based on the number of completed surveys and reflects only information from those surveys. This information is intended to be general, and these overviews are no substitute for professional, legal or consulting advice. This information should not be construed as advice from Rydex Investments or any of its affiliates.