InFocus: Practice Transition

Compression & Commoditization

Compression & Commoditization

Competition for new clients is increasing and advisory fees are shrinking in part because clients have access to greater information and expertise in the form of low cost platforms. In 2016 the average U.S. advisory fee for new accounts was 1.02%, down from 1.04% in the prior year and 1.21% in 2014, which is a 15.7% decline in two years. Canada appears to be experiencing a similar situation. Greater access to free or low cost information and expertise is making it hard for investors to appreciate the value good advisors bring to the table. When investors shop around for better fees they drive down prices. This means that to a certain degree, fee based advisory services are becoming commoditized.

Advisors can elect to cut expenses to offset the fee decline and maintain their income but only for so long. Advisors really have only three options: get bigger, specialize or outsource.

Increasing competition and more options for investment services leaves advisors with less pricing power which means advisors could consider getting bigger by adding clients to offset lost revenue. To do so advisors should think of actively marketing their practices, offering new products and services or enhancing existing services.

Advisors could also join a team through a formal business partnership to cover different areas of expertise and provide services that are beyond their skill set or capacity to offer. Alternatively they could choose to work with another advisor who has a complementary expertise. Another option is to merge with another firm but at the expense of giving up the autonomy of running their own practice.

One challenge of getting bigger is to ensure that the appropriate staff and infrastructure are in place. The top clients need to get great service and have access to the best advisors. A staffing option is to add a dedicated client service professional who is not an advisor but whose job is to make sure clients’ needs are met. On the infrastructure side advisors will need to consider technology to make sure they are equipped with the latest customer servicing options.

Advisors who do not want to get bigger or find that getting bigger is too much work could find a specialty and make sure they are known for it. Whatever the specialty having an area of expertise means that certain clients will not be inclined to shop around based simply on price. Advisors must build their brand by touting their expertise with the credentials to back it up so they will need to obtain any number of the numerous professional designations and certifications available. They will have to network with other professionals or organizations that share their niche and differentiate themselves from advisors who are generalists. They must be willing to meet with prospective clients themselves rather than delegating this important meeting to another advisor or member of their support staff. Specialist advisors will find they have an edge when marketing their expertise to prospective clients through websites, in publications or by speaking to groups interested in that advisor’s expertise.

Getting bigger or specializing often means that something has to give. This is where outsourcing comes into play. Outsourcing administrative tasks and investment management allows more time to be spent with clients. A study by Northern Trust in the U.S. found that 70% of advisors reported growing their practices significantly after outsourcing. Not only did they spend more time helping clients plan their lives, it also brought them more personal satisfaction.

Working with a third party provider to handle everything from portfolio construction and management to rebalancing, compliance, research and back office support has been a fast growing trend among advisors over the past decade. Before choosing an outsource supplier, consider the following:

  • Look for providers that share your investment philosophy
  • Determine all fees and costs
  • Confirm advisor and client account minimums
  • Find out who is the firm's custodian
  • Ensure the technology is easy to use and integrates with your structure
  • Consider the ease of transitioning in and out of the plan
  • Evaluate the advisor and client logistics to change to the new business model

Some advisors fear clients will not respond well to the idea of outsourcing. Of course advisors will need to educate their clients about the benefits of this type of partnership. If handled correctly the client experience will be improved, as was confirmed by 92% of advisors surveyed who have outsourced since 2014. Ultimately advisors will have to make decisions that are going to change their practices as market forces reshape the world around them. The only real question is which path they will choose to take.
 

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