Even as pricing on fee-based accounts continued to fall for new and existing wealth-management clients, 2017 saw significant growth in asset and revenue growth for advisors. But despite what the broad industry trends suggest, financial professionals should not simply slash prices and expect more clients or assets.
That’s one of the key conclusions advanced by PriceMetrix in a new report, according to a piece published by WealthManagement.com. According to the report, average fees slid from 1.13% in 2016 to 1.08% in 2017 for households that have between US$1 million and US$1.5 million invested. The picture was similar for new accounts, where fees went from 1.07% to 1.04%.
But the firm found that only 30% of advisors actually lowered their prices, with the average reduction at 23 basis points; the other 70% of advisors actually raised fees by 4 basis points on average. Comparing the two groups, the firm found that advisors who lowered fees actually took in fewer assets and saw less revenue growth than those who raised fees.
“That supports something we’ve seen, frankly, for 15 years, which is, clients don’t leave because of price; they leave because of service issues,” said Patrick Kennedy, chief customer officer and co-founder of PriceMetrix. He added that advisors who may have services issues are losing assets more quickly and responding by lowering prices.
Kennedy argued that the drag in pricing could be chalked up to advisors whose main selling proposition is centred on investment selection or portfolio construction — an area where robo-advisors are able to compete at a much lower price point.
“There’s no evidence that there’s a market-clearing price for advice—that everyone needs to chase the same fee,” he said. “There’s lots of room for different propositions.”
The top-quartile advisors in terms of year-over-year growth were also less prone to lowering their prices than those in the bottom quartile, the report found. Such upper-tier advisors also derived more of their revenue from fees than transactions, resonated slightly better with younger investors, and were more likely to work in teams — all factors that were heavily correlated to growth.
Advisors in this group were also more likely to step back and understand pricing and pricing dynamics, Kennedy added.
“Even just the awareness that not all advisors are lowering their price may be enough to give an advisor the confidence to stop, pause and decide deliberately [on] what’s an appropriate price for [their] service,” he said.
Price war: advisors who ignore profitability 'playing with fire'
No fee pressure for elite FAs: Pershing
More market talk: