Loss leaders often lead to losses

New data show that so-called ‘loss leaders’ frequently result in losses for advisors, even as more of them turn to deep discounts to win business.

Loss leaders often lead to losses

Many financial advisors claim they make up for discounts on one service by charging more for the other. However, new data show that so-called ‘loss leaders’ often lead to losses for advisors.

“We hear advisors say all the time that they recoup revenue given up on their fee-based business through their transactional business, as well as the reverse,” commented Doug Trott, president and chief executive of Toronto-based PriceMetrix. “This could be an effective strategy, if that’s what advisors really did.”

Drawing on a proprietary database of nearly 500 million transactions and over $3.5 trillion in investment assets in both the US and Canada, PriceMetrix assessed the loss-leader claim by looking at hybrid households, which are those with both fee-based and transactional accounts. It further refined the study by looking at households with investment assets between $500,000 and $1 million.

Advisors were categorized as low or high on their transactional pricing, and low or high on their fee-based pricing. Consequently, advisors' pricing behavior could be grouped into one of the following four categories: trade off non-fee for fee revenue, trade off fee for non-fee revenue, premium pricing and habitual discounting.

PriceMetrix found that 21% of advisors trade off fee for transactional revenue, while another 21% trade off transactional for fee revenue. More frequently, though, advisors price the same for both types of business, either at a premium, 29%, or at a discount, 29%.

“Our main finding is that the claim of a loss-leader pricing strategy, while not implausible, is far from the prevailing pattern of behavior in the market,” Trott said. “We find that advisors are more likely to be consistent in their pricing, either high or low, across both fee and transactional business, although, to be sure, a wide range of pricing behaviors is also evident.”

The question of what strategy to pursue in pricing fee and transactional business is ultimately one for an individual advisor to decide but it is critical for the advisor to adopt a strategy and consistently execute it, PriceMetrix said. Advisors can choose to price consistently across product lines or they can make a conscious choice to forego revenue in one place and recoup it elsewhere.

However, the consultancy cautions that advisors who choose a loss leader strategy need to be certain that their pricing on the other half of their business is truly makes up for their losses.