When advisors told Fidelity that its next RIA benchmarking study should focus on pricing strategies, they wanted the findings to show that “everything’s fine; they could continue down a path of inertia,” recalled David Canter.
However, that’s not what the study’s findings yielded at all, reports Canter, Fidelity Clearing and Custody’s practice management honcho. Instead, he said the survey of 402 RIA firms of all sizes conducted earlier this year found that “the profession is in a period of unprecedented change,” marked by a significant slowdown in the growth of advisors’ assets under management. The survey — A Future-Ready Pricing Model: Finding the Right Formula in a Changing Landscape — found that “organic growth” in AUM has “slowed to the lowest level in five years,” to 6.7% in 2015, Canter says.
Due to RIAs’ traditional AUM fee pricing model, that slowdown means revenue growth has stalled, which in turn means that profit margins are under pressure.
Comparing earnings before owner’s compensation (EBOC) from Fidelity’s 2013 and 2016 studies, that margin has declined 2.1 points, or an average of 0.7 percentage points per year, according to Mathias Hitchcock, Fidelity’s vice president of practice management and consulting. Median revenue yield — defined as fee-based revenue divided by average fee-based AUM — declined as well in the survey, from 73 basis points in 2011 through 2014 to 69 bps in 2015.
The problem is being exacerbated by several other issues: increased competition from digital advice platforms, the aging of advisors’ client base into the decumulation phase and revenue pressure from regulations, including the Department of Labor’s fiduciary rule.
“The biggest issue” for advisors raised in the findings “is one of change management,” Canter argued in an interview on Wednesday.
After all, he said, “the anatomy of an advisory business is simple: your revenue will be driven by assets under management.” Advisors get new assets either by attracting new clients or getting more assets from existing clients. “But clients may leave you” due to their death, for instance, or because they fire you or because you fire them, he pointed out. Aging clients’ assets may decrease once they enter retirement’s decumulation phase, thus the slowdown in organic AUM growth — new assets minus withdrawals and not counting any growth help from the markets. In fact, Canter says the data shows that advisors “have not gotten anything from the markets in the last few years” in terms of growing net assets under management, “so the onus is on advisors to analyze their book of business,” including performing a demographic analysis of the client base, to help figure out “where is that next new client coming from?” What about merging with or acquiring another firm to “scale up?” Again, the data shows that M&A itself has not added to advisors’ organic AUM growth.
So what’s the solution for RIAs to this revenue slowdown? Two primary shortcomings that should be addressed, the survey and Canter suggests, are how advisors price their services and their lack of a digital strategy. On pricing, the survey found that only one in five firms of all sizes regularly reviewed their pricing strategies. That’s a mistake, according to Canter, who said firms should determine “what’s your unfair advantage that makes you so valuable to do business with,” and then price your services to match that advantage. Some firms “do a good job of articulating their unfair advantage” in the marketplace, but more need to do so to reverse the slowdown in advisory firm financials and thrive in the years to come.
Such “future-ready firms,” Canter said, are preparing for the changes already buffeting the advisory profession, though “you don’t have to change pricing if you add more value.” Jokingly calling himself a “billable hours refugee,” Canter said that while some firms do charge by the hour, “this is not a business that is hours driven,” though he suggested that “we may be evolving to a place that is more scientific driven” when it comes to matching a firm’s fees with the value that it delivers to clients; robo-advisors’ low cost model may be prompting firms to move in that direction.
The report debunks three major “pricing myths” to which too many firms adhere.