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April 21, 2011 at 06:53 AM
Will lowering your rates attract more clients? Not according to a recent study. In fact, lowering your rates could backfire and decrease your attractiveness to potential clients.
PriceMetrix, Inc., a software firm, published the study, which focused on the needs of wealth management firms and their advisors. The firm considered data from 380 million transactions conducted between 2007 and 2010. Included in the data pool were one million fee-based accounts and four million transactional accounts totaling over $850 billion in investment assets.
The results of the study show that advisors are miscalculating the appropriate value of their services—and losing money in the process— averaging $20,000 in lost fees.
Detailing the Lost Dollars
Assets in fee-based accounts have increased significantly in recent years, and they’re generating more revenue for advisors who use them. During the survey period, the average advisor’s assets increased 24% in fee-based accounts and declined 1% in transactional assets. And although fee-based accounts made up only 25% of total assets under management considered in the survey, they generated 37% of total revenue.
Fee-based accounts may be uniformly popular, but the fees charged by advisors are anything but uniform. For accounts with assets ranging from $250,000 to $500,000, advisors in the bottom quartile charged an average fee of 81 basis points, whereas advisors in the top quartile charged 208 basis points—a difference of 127 basis points between the top and bottom pricers.
“The most surprising thing to us was the wide range of prices charged for similar
relationships on similar-sized fee-based accounts,” says PriceMetrix President and CEO Doug Trott. Although it makes sense for advisors to give discounted rates to big accounts, some advisors were giving the same deep discounts to small households—indicating that advisors have no reliable sources to reference when setting their prices.
