Will lowering your rates attract more clients? Not according to a recent study. In fact, lowering your rates could backfire and decrease your attractiveness to potential clients.
PriceMetrix, Inc., a software firm, published the study, which focused on the needs of wealth management firms and their advisors. The firm considered data from 380 million transactions conducted between 2007 and 2010. Included in the data pool were one million fee-based accounts and four million transactional accounts totaling over $850 billion in investment assets.
The results of the study show that advisors are miscalculating the appropriate value of their services—and losing money in the process— averaging $20,000 in lost fees.
Detailing the Lost Dollars
Assets in fee-based accounts have increased significantly in recent years, and they’re generating more revenue for advisors who use them. During the survey period, the average advisor’s assets increased 24% in fee-based accounts and declined 1% in transactional assets. And although fee-based accounts made up only 25% of total assets under management considered in the survey, they generated 37% of total revenue.
Fee-based accounts may be uniformly popular, but the fees charged by advisors are anything but uniform. For accounts with assets ranging from $250,000 to $500,000, advisors in the bottom quartile charged an average fee of 81 basis points, whereas advisors in the top quartile charged 208 basis points—a difference of 127 basis points between the top and bottom pricers.
“The most surprising thing to us was the wide range of prices charged for similar
relationships on similar-sized fee-based accounts,” says PriceMetrix President and CEO Doug Trott. Although it makes sense for advisors to give discounted rates to big accounts, some advisors were giving the same deep discounts to small households—indicating that advisors have no reliable sources to reference when setting their prices.
Determining the Appropriate Value of Your Services
Determining the value of your services is a complex task. But price elasticity will not drive growth in your advisory business. Don’t become obsessed with finding the elusive “perfect price.” Instead, remain focused on meeting clients’ objectives, maintaining open communication, and reinforcing clients’ confidence in the investment process.
Raising your fees on existing clients can be very difficult, so it’s important to charge enough from the beginning. The study found that of the 32% of advisors who increased their revenue on assets over the study period, they did so by increasing their fees on new accounts. Those advisors who increased their fees were already
priced above the average—and those advisors opened 25% more new accounts than advisors who lowered their fees over the same period.
The conclusion: lower-priced advisors are not stealing business away from advisors charging higher fees. Don’t shy away from charging what your services are worth. It’s especially important to set the right price at the beginning of the advisor-client relationship—it’s always easier to adjust prices down than it is to adjust them up. Instead of relying on the competition to measure the value of your services, consider adjusting your prices to more closely match your firm’s fee-based price schedules.
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See also The Law Professor's blog at AdvisorFYI.