Coronavirus Crisis Is Putting Client Relationships to the Test: McKinsey

Under the shadow of the COVID-19 pandemic, clients will look to their financial advisors for strength, stability and perspective in the months ahead.

For their part, the decisions advisors have made since the 2008 financial crisis stand them in good stead to deliver on those demands, according to a report released Thursday by PriceMetrix, part of McKinsey & Co.

Advisors’ assets and revenue have surged during the long period of growth since the last bear market.

Many advisors changed how they work with clients. As digital entrants and lower cost services challenged the value of portfolio construction and monitoring, advisors refocused their value propositions on more comprehensive planning for more complex clients.

Advisors have also changed the way they get paid, with more than two-thirds of their revenue coming from asset-based fees, up from one-third a decade ago. Today, relationships are deeper, and client retention rates have peaked.

This broader, personalized and service-oriented proposition now faces a stringent test, as advisors prepare to guide clients’ emotions and portfolios through a period of great uncertainty, the report says.

The report was based on the PriceMetrix proprietary database collected from some two dozen North American wealth management firms. The data set was constructed from detailed client holdings and transaction information of 65,000 financial advisors.

According to the study, median assets per advisor at the end of 2019 were $120 million, up by 8.4% per year since 2015. Revenue per advisor grew by 5% per year to $717,000 in 2019.

Because of robust growth from existing relationships, advisors have had less incentive to add new clients, the report said. Last year, they opened 7.5 new client relationships, the same number as in 2016.

The current crisis will test client retention, given that clients are likelier to switch advisors in a downturn, according to PriceMetrix. In 2009, 10% of clients defected, the highest level during the ensuing years to 2019, when attrition rates fell to a record low of 5%.

Client attrition is likelier to be higher in the year ahead as the pandemic has affected clients disproportionately; many entrepreneurs have suffered both business losses and portfolio losses. Passive advisors who are reluctant to step up and serve their clients will see more of them leave, PriceMerix said.

Some advisors will do better than other in retaining clients, according to the report. This comes down to how much time advisors can devote to clients with whom they have forged deeper relationships by serving them more holistically — advisors are now likelier to be the main advice provider for the clients they work with.

Between 2015 and 2019, the number of accounts per household served by an advisor grew from 2.7 to 3.1. And during the same period, the percentage of households with retirement accounts went from 65% to 72%.

The fewer clients demanding an advisor’s time, the more attention each one will receive. PriceMetrix said this dynamic is particularly important in periods of market uncertainty, like the present.

Wealth management pricing has dropped steeply in recent years, tempering market performance-related revenue growth, according to the report. Last year, something like a new normal in aggregate price levels emerged. Annual fees for new accounts of households with between $1 million and $1.5 million invested averaged 1.01%, essentially flat since 2017 and down from 1.07% in 2015.

Pricing on both existing and new accounts continues to decline, the report said. However, new account pricing stability suggests that the two will converge sooner than later.

How will advisors’ income look following recovery from the current crisis/?

PriceMetrix found that 17% of advisors lowered their prices during and after the 2008 financial crisis. Following recovery, they increased prices, but these stabilized at the midpoint between pre-crisis levels and the bottom. These “sympathy pricers” followed the market down, but hesitated to reset prices as quickly when markets trended upward.

In 2020, PriceMetrix noted, advisors earn significantly more revenue in the form of asset-based fees than they did in 2008. So, as markets retreat, advisors’ income will, too.

One drawback — among several benefits — of fee-based accounts, it said, is that advisors will likely provide much more research, communication and guidance during the crisis, but will actually be paid less.

— Check out How an Advisor Handled 2 Tough Client Cases in Florida’s Tourism Mecca on ThinkAdvisor.