Why advisors will soon pay more to take home less

Why advisors will soon pay more to take home less

Why advisors will soon pay more to take home less A new study highlighting what it will take to gain market share in Canada suggests financial advisors will have to up their game to remain relevant to clients and ultimately this means you’ll have to accept lower margins to do so.
 
“The issue is going to be top-line margins, in other words what they [brokerage firms] are going to pay us before we figure out what our factors are going to be. The top-line may shrink a little bit also because you have to reduce the price the clients pay from the competition, said a seasoned GTA broker requesting anonymity. “The bottom-line margin, which is what services you’ve got to pay out of pocket for is likely to increase.”
 
The Canadian Securities Institute’s report on high net worth investors points out that these clients are looking for more sophisticated services and advice from financial advisors and that costs money. Whether the value proposition requires adding a tax professional or some other expert it’s the cost of doing business in a highly competitive and client-focused business environment.
 
Michael Kitces, a well-known financial commentator and advisor in the U.S., uses the value-add argument as a means for fighting robo-advisors, something we also face in Canada.
 
“…They must compete on value and differentiation – offering comprehensive financial planning services, ideally focused into a differentiated niche,” Kitces wrote in a November 9 blog post. “In other words, advisors won’t likely aim to cut fees to compete with robo-advisors, and instead should try to provide greater value-add to defend their existing (1% or whatever) AUM fee, justifying their cost by delivering gamma (financial-planning-based enhancements to wealth) rather than (just) alpha.”
 
So, advisors here in Canada face a double whammy – increased pressure to provide more value for clients and increased competition from robo-advisors – and that should be a blessing for those that have the right infrastructure in place and a curse to those that don’t.
 
“It means a lot of clients won’t be economical to bother working for because you’ve got to make “x” dollars per hour servicing someone. If someone’s paying you $300 per hour to service them and you need $500 per hour to support your infrastructure, you’re not going to keep them,” said our seasoned GTA broker. “If I add a bit of infrastructure I’d probably have capacity to take on more [business]. That’s a very viable point of view.”
 
1 Comments
  • Mike Gentile 2015-11-19 5:38:02 PM
    I can't help but wonder if the regulators have borrowed a page from the airlines industry where we get to pay more for less. I was just notified by a supplier that my tech costs would be increasing by25%.I have to believe that this is just the tip of the iceberg as it relates to overall industry costs. I find it interesting that those who propose the elimination of imbedded compensation and a reduction of MERs can ignore the flip side of the coin(expenses and there are many today).Would it be unreasonable to think that if you pay less that you should probably get less? The reality is that our costs continue to increase along with the HST that gets added to each and every expense component. We all know that taxes won't be disappearing any time soon. My only question now is when will the reality sink in that there is no such thing as a free lunch. As my dear old dad used to say" there are only 2 certainties in life and they are death and taxes". Perhaps the proponents of increased costs and reduced compensation can find a solution to the afore mentioned death and taxes issue.
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