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October 09, 2013 at 10:54 AM
Rampant discounting by advisors in pricing their services — while possibly the result of a lack of confidence in the value they offer clients — is often dressed up in the language of business grand strategy. Discounted commissions are portrayed as merely “loss leaders” that make possible the higher fee income the advisor is seeking, or vice versa.
A recent study by PriceMetrix takes a closer look at how loss-leader pricing stacks up in the advisory industry and suggests that advisors — through inconsistent pricing — might not be making up for their losses.
The Toronto-based practice management software and data services company undertook the study after hearing many advisors describe their discounting as part of a formal strategy.
“We hear advisors say all the time that they recoup revenue given up on their fee-based business through their transactional business, as well as the reverse,” Doug Trott, president and CEO of PriceMetrix, said in a news release. “This could be an effective strategy, if that’s what advisors really did.”
To find out what advisors were doing, PriceMetrix first took a broad look at pricing of household asset management and found it to be remarkably uniform.
Narrowing its field of study to households with between $500,000 and $1 million in assets and hybrid fee and commission pricing, PriceMetrix found that 25% paid discounted commissions but nondiscounted fees; 25% paid premium pricing on both; 25% received discounted pricing on both; and 25% paid discounted fees but nondiscounted commissions.
PriceMetrix then altered the view, moving from household assets to the advisor level, and found that advisors were likelier to maintain consistent pricing across fees and commissions than they were to use loss-leader strategies (despite much anecdotal information about the prevalence of this approach).
“Examining aggregate fee and non-fee pricing for hybrid households across thousands of advisors’ books reveals that 21% of advisors trade off fee revenue for non-fee revenue, and another 21% trade off non-fee revenue for fee revenue. The more frequent outcomes are for advisors to price both types of business consistently — at a premium (29%) or at a discount (29%),” the study finds.
