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November 28, 2018 at 02:00 PM
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.
