With the advisory role expanding and profit margins shrinking, industry chatter has turned to a touchy topic: the advisor’s price tag.
As Dennis Gallant, president of GDC Research, frames it: “Advisors are doing more and more for their clients. Yet we think advisors still aren’t charging enough as they add services — and that’s a concern. When portfolios are down, there’s a reluctance to go to the client. It’s a huge dilemma for a lot of advisors who say: I’m doing more for my client but I don’t dare ask for more money.”
Indeed, a report from GDC Research and Practical Perspectives revealed that most advisors do not plan to seek additional compensation over the next three years. And that’s on top of an industry-wide inertia that has resulted in this little factoid: Most fee-based advisors haven’t adjusted their pricing structure in years — even decades.
At Schwab Advisor Services, Gabriel Garcia, managing director of business consulting, says that half if not more of the engagements he is currently involved in with advisors are connected to what he calls the client experience: notably pricing, profit structure and accountability.
“The economic environment of the last 18 months has really shined a light on the client experience. It’s not that clients are looking at fees with more scrutiny. It’s the relationship. They’re asking more of their advisors than they had in the past with respect to level of engagement, level of resources and frequency of interaction,” observes Garcia.
In discussions with one advisory firm, in business 23 years, Garcia asked the principals whether they had added capacity and skill sets over that period. Their reply: “Absolutely.” When asked whether they had raised fees to legacy clients who have been with them from the start, the answer was no. “These are fees that date back to a different business model, yet there’s this hesitancy to talk about fees and price,” Garcia notes.
The market meltdown, which saw AUM fees plummet 40 percent, triggered some rethinking about how advisors are paid. The upshot: Most advisors are sticking with their AUM fee of roughly 1 percent but some are adding project fees or financial planning fees of $3,000 to $5,000 for work invested at the front end. Others are asking higher fees of new clients. And, as the market moves to its new normal, many advisors aren’t doing anything at all.
Philip Palaveev, president of Fusion Advisor Network, wonders whether they should.
“It may sound controversial but I would ask: Do you really need to do anything? Collectively advisors, especially fee-based advisors, made a promise to clients that we’re going to take care of them and be on the same side of the table with them. We certainly benefit in good times from that equation,” says Palaveev. “Outside of some very obvious measures — making sure you’re as efficient as possible, not servicing relationships that are not a good fit for you — outside of that I would say suck it up.”
Historically, he adds, advisors have not competed on price and size. As he puts it: “In a restaurant, it’s clear what differentiates the deluxe steak from the hamburger. What advisors do is mystery meat.”
Further, he says, clients — who typically do not understand the multiple costs of being invested with an advisor — tend not to price shop for advice. “It’s a professional service. Generally speaking, people don’t price shop for a surgeon or a dentist,” according to Palaveev. “Lower price generally means lower quality.”
Interestingly, the only place where there appears to be any fee pressure is at the high end of the marketplace. Brian Holmes, who heads Los Angeles-based Signature Estate & Investment Advisors, said perhaps 5 percent of his clients asked for wiggle room on fees during the market collapse. “We’ve never had it happen before,” says Holmes, whose firm had $1.5 billion in assets under management at the end of last year. “I had one client who said ‘I’m asking this of my gardener, asking it of my lawyer and now I’m asking it of you.’ It was happening enough we had to formulate a response.”
The firm’s response: a firm no — with an explanation of all the additional services the client benefits from outside the fee charged for traditional investment management.
Stephanie Bogan, president and CEO of Quantuvis Consulting, says advisors often get into trouble with prospective clients when they essentially discount their services in order to win new assets.
“They’re going in for the close. There’s that need to win business at all costs, that ‘Here’s our fee — but for you’ mentality,” she notes. “And they’re doing themselves a disservice. The underlying issue is that they’re always talking about the value they add to clients but they lack confidence about that value when they’re trying to get someone to say yes or no. It’s all about how you position yourself. Products go on sale, services do not. I’ve never seen an ad for a lawyer’s office that says: Normally $300 an hour, this week $250.”
The surest way out of a profitability squeeze is to raise fees or improve operational efficiencies — or both. First, experts say, it’s essential to conduct a self-inventory.
“You have to have that conversation internally,” Garcia suggests. Among the talking points: Whom do we serve best? Who is our target client? What is it their needs demand of us? Next: What is the cost to deliver those services? Is it appropriate to segment clients in the delivery of service and experience — and might it not be wise to segment pricing as well?
After that, examine your fee schedule closely. “I have clients who have made all these exceptions along the way. In one $700,000 practice, the difference between the fee schedule and the discounts was $220,000,” says Bogan. “That’s unacceptable.”