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. 

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“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. 

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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.

Myth 1: My Firm’s Pricing Model Does Not Need to Change.
The report’s response: “Despite recognized trends like increasing competition and the transfer of wealth to younger generations, less than a third of firms see these forces as catalysts for change. Only 1 in 5 firms regularly review their pricing models, and specific plans for change are limited.”

Myth 2: My Firm’s Pricing Model Is Simple and Easy to Understand
The report’s response: “Over 70% of firms agree with this statement, but the tremendous variation in offerings and fee models across firms creates major challenges for investors interested in comparing RIAs.”

Myth 3: My Firm’s Pricing Model Reflects the Value We Provide
This is perhaps the most important — and damaging — myth that RIA firms mistakenly embrace. The report’s response: “The top driver of RIA pricing approach is a deep understanding of value delivered, but the data reveal misalignment between offerings, pricing and delivery. Segmentation, unbundling and use of minimum fees are key opportunities.”

RIA firms with more than $1 billion in AUM — there were 67 such firms in the survey — were a little more likely to review pricing models regularly: 27% of the biggest firms reported doing so, compared to 22% for all the other firms in the survey. Bigger firms tend to be “more sophisticated and specialized in how they use their resources,” Hitchock said, including being “more advanced in reviewing pricing models.”

As for building digital strategies, Canter said bluntly that future-ready firms must “have a digital presence; there’s tons of opportunity,” though he also urged firms in their digital offerings — whether it’s writing articles that display their intellectual capital or producing podcasts — that they be not only “resident on the firm’s website,” but that they are connected to each other, or “threaded together,” as Canter says.

The survey found:

  • More than half of firms (54%) do not have any digital strategy and do not intend to develop one;
  • Less than a third of firms (29%) plan to learn more this year or next, and develop a strategy;
  • Only 19% of firms indicated that they plan to deploy digital strategies to increase efficiency;
  • Only 18% of firms indicated that they plan to deploy digital strategies to grow with small clients;
  • Virtually no firms (4%) said they plan to launch a separate digital business.

The firms that do have explicit digital strategies, Canter reported, “are growing and have a more sewn-together digital strategy.” But it’s not just digital that works: “We’re big proponents of [firms having] an ‘omnichannel’” approach, predicting that “in the future you need both digital and human” offerings to succeed.

“You can’t boil the ocean,” Canter says, but instead firms should “focus on one or two measurable things and try them; just be methodical about it” and “pilot before you make a huge investment” to scale those strategies that work.

The pricing study, he says, should serve as a “reminder that it’s time to be sharp about the future,” that reviewing your pricing strategy regularly and instituting a digital strategy is all “tied to revenue” and which will tend to improve the valuation of a firm while also “attracting new staff.”

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