Innovation | 06.14.18
As Advisory Landscape Changes, Alternative Pricing Models Emerge
Two seemingly irreversible trends are reshaping the advisory industry. Fast-evolving technology is driving down the cost of personalized financial services, and regulations are putting fee-charging practices under a microscope.
Among the most pressing strategic issues going forward will be whether, or how, to amend pricing models. Slightly? Drastically? On a case-by-case basis?
For the moment, the asset-based model remains the norm. Some 86 percent of registered investment advisors charge asset-based fees, according to InvestmentNews.
How much longer that will be the case depends on how tech and regulatory trends continue to play out — seismic shifts are sometimes preceded by tremors, but not always. Asset-based fees have had a nice, long run; however, as Robert Frost/Ponyboy Curtis reminds us: Nothing gold can stay.
The evolution of fees, owing to client demands, regulatory mandates and competitive pressure, are ranked among the “Top Ten Wealth Management Trends in 2018,” according to Capgemini Financial Services, which puts out its watch list annually.
Meanwhile, a May 2018 research report, titled “The Future of Fees: Real Life Pricing Innovations in Wealth Management,” from consulting firm Simon-Kucher & Partners exhaustively explored a variety of pricing alternatives that advisors may want to consider.
A Panoply of Pricing Paradigms
The report illustrated what new pricing paradigms look like in reality via mini case studies of entrepreneurial advisors proudly unshackled to convention. The pros of their ways are emphasized, but it also addresses common challenges in implementing these models while not shying away from the objections surrounding them.
"Moving to a new pricing paradigm will not be easy, but it is possible to take note, heart and insight from entrepreneurs who have walked the walk and are blazing a trail for the future of financial advice," the authors said.
Here's a quick look at four of the fee-model varieties discussed in the report:
- Charging by the hour. While clients are often more sensitive to prices expressed in dollars than in basis points, the authors write, there are instances when myopia undercuts opportunities to charge for services rendered on the way to landing an asset-based account. How clients react to being subjected to billable hours depends on how the information is conveyed.
- The three-part model. As you’d expect, there are three components: asset management (with an asset-based fee remaining at the core), a one-year financial plan (carrying a fixed fee) and ongoing support (which can be purchased ad hoc for either a fixed or hourly rate). "Although more complex, the mechanics of the fee structure are easy to grasp," the authors said. "And because each fee is linked with a corresponding service, it is easier for clients to see what they are paying for."
- Fixed-fee only. A bold but authentic approach that says “here’s what it will cost, in hard dollars.” Sticker shock can be neutralized by linking fees directly to value of the services provided, particularly if a lot of thought (beyond, say, allocating to some index funds and calling it a day) goes into the advice package and resulting plan. Complexity, the authors said, can be a better basis for pricing than asset value.
- ‘McDonalds’ Menu. In a society shaped increasingly by millennials, the advisory offering will progressively revolve around client choice. “There are many forces driving this, including access to information, mistrust of the financial industry and a wider shift in the consumer mind-set towards personalization.” Fully presenting the widest possible menu of selections is a departure from today’s specials: cheap or expensive.
The diversity of fee models in the Simon-Kucher report illustrates the fact that “there is no ‘new fee model,’ but that the future is simply likely to be more diverse.”
Some common denominators, however, set the models apart. One is a recognition of complexity as a driver of variation between clients and the other is that there are situations when an advisor is better off putting a fence around value rather than offer everything on an all-you-can-eat basis.
The good news here is that financial advisors appear to be interested in making a change. A survey of 450 advisors recently conducted by Fidelity Clearing and Custody Solutions (FCCS) shows the commoditization of investment management — and the fee compression that comes along with that — represents the number one issue that will impact advisory firms in 2018. (The cost of doing business was the top issue last year, as worries about regulations were running higher.) Advisors are deploying multiple strategies to address this commoditization/compression trend, including reevaluating their pricing strategy and improving how they communicate their value proposition to clients, FCCS said.
The model variations spotlighted in the Simon-Kucher report surely will strike many advisors as non-starters. The authors do stress how different advisors arrive at the right approach for themselves and their clients as particular situations dictate. No one is predicting the traditional model is going anywhere soon. In fact, the research suggests asset-based pricing will continue to dominate at the baseline even as new pricing models emerge on the periphery.
Then again, hefty brokerage commissions used to be the norm.
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.