The average advisor is generating more revenue per client than ever — but this momentum may not stem from pricing discipline. For the average firm, the increase in revenue stems from market lift, increases in asset flows and growth in wealthier clients.
Sponsored by BNY Mellon Pershing, the 2018 InvestmentNews Study of Pricing & Profitability revealed that 28% of the respondents redefined their fee brackets based on assets under management. More than half of those making some price adjustment actually raised their fees. This was true among the top-performing firms as well as the average participant in the study.
Seventy-two percent of those surveyed made no change at all to their fee schedule. Basis points on assets under management have declined slightly, while the dollar revenue per client has increased. What we have found, is that as client size increases, firms hit natural break points in the schedule. The result is that clients’ total fees will increase while basis points decrease.
Interestingly, 10% of the firms who responded actually lowered their fees (13.7% of the top-performing firms). Did they reduce fees because of client pushback or because they anticipate a need to discount based on market pressures?
An advisor’s pricing strategy reveals his or her perception of the firm’s value in the marketplace. With most advisors raising fees or holding steady, what made those few firms feel the need to reduce prices? Some advisors say they have started to cut their fees because they keep reading about fee compression and they are concerned about being at odds with the world around them.
Those who preserved or raised their fees in the past year are demonstrating confidence in their proposition. They have a strong connection with their community of clients and prospects. They have made it easy to do business with them, and have helped clients achieve success in pursuit of their goals.
Furthermore, advisors who enriched their offering to be more relevant to their optimal client are able to demonstrate value where automated portfolio management platforms and discount brokers cannot. For example, some have added reporting that includes non-investment related goals.
Some have developed a unique process around philanthropy or managing multi-generational wealth. Others have added tax planning or bill paying to their offering, and many have become involved in negotiating banking needs on behalf of their clients such as mortgages, lines of credit and business loans.
A Clear Strategy
Advisory firms who rely on investment performance as their primary differentiator suffer when clients compare their annual returns to the general market indices. Pricing must have a clear strategy.
If you are reducing your fees, you may be negotiating against yourself. It’s time to ask:
1. Are you extrapolating from isolated conversations with a few clients who demand a fee reduction — before validating how your overall client base perceives you? 2. Are you trying to be the price (discount) leader in order to grab market share? 3. Do you believe that you are not worthy of what you are paid relative to what you are delivering? 4. Do the constant headlines about pricing pressure cause you to think you are out of sync with the market?
It is critical to understand the cost/price/value elements of your pricing strategy before making wholesale reductions in fees. Discounting often represents an emotional response to a rational problem. Clients demand a price break if they are dissatisfied; advisors concede their fees as a way of appeasing or pleasing their clients.
When analyzing your pricing strategy, start with a basic understanding of costs. Divide your total cost of doing business by your number of clients: this reveals your cost per client. There are more sophisticated approaches of course, but this is a foundational step.
With an understanding of costs, you can then create a target gross profit margin per client. Generally, an advisory firm aspires to achieve a 60% gross profit margin. Gross profit is determined by subtracting direct expenses from revenue.
Direct expenses are all costs related to professional compensation including fair compensation for the owner/advisors and allocated costs of paraplanners and other professionals involved in the relationship.
As an example, if you generate $50,000 of fees from the client and it costs you $20,000 to service them, you derive a $30,000 gross profit on the relationship. By dividing the gross profit dollars by the annualized fee, you can determine your gross profit margin on the relationship (e.g. $30,000).
Consumers have benefitted from dramatic reductions in custody fees, expense ratios for mutual funds and a substantial shift to ETFs and lower-cost index funds.
Advisor fees have remained relatively high, with an average yield on assets of 69 basis points going to them from their clients. The lower cost to invest through any channel combined with the rising markets has made price less of an issue for advisors.
Discount brokers and digital platforms have been delivering portfolio management offerings for far lower rates, however. They are using their substantial marketing muscle to convince investors that personal relationships with real humans are not worth the price.
Eventually, advisory firms will have to compete on price and value — especially among newer generations of accumulators. A random check of any advisory firm in your market will reveal a similar offering: “We deliver comprehensive portfolio management, tailored to your needs. We are committed to integrity, trust and the fiduciary standard.”
As a consumer, I would question that statement. Are you saying your competitors consciously operate in their own interests over their clients? Why do you feel the need to promote a behavior that should be a reasonable expectation? What evidence proves that your message has moved you or your clients closer to where they want to be?
In other words, nothing in the messaging or the experience justifies premium pricing.
Soon, advisors may not be able to ride a wave of rising markets and lower risk. Advisors truly earn their keep during down cycles. However, reducing fees without evidence of real pressure from your clients or the marketplace is more a reaction than a strategy.
It is critical to be aware of the cost it takes to deliver on your promise; to be aware of the competitive landscape for similar offerings; and to introduce value to your optimal client while your competitors are defending their tired propositions and responding to pressure with discounted fees.
Mark Tibergien is CEO of BNY Mellon’s Pershing Advisor Solutions. Tibergien is also the author most recently of “The Enduring Advisory Firm,” written with Kim Dellarocca of BNY Mellon and published by Wiley. He can be reached at firstname.lastname@example.org.