New report on fee innovation says wealth management industry is at a critical juncture
Innovate or die is the stark message from a new report into wealth management fees.
While acknowledging the risks involved in changing pricing models – especially in haste – the study by Simon-Kucher & Partners titled “The Future of Fees: Real Life Pricing Innovations in Wealth Management” insists that the industry is at a point of division.
One side consists of those willing to innovate and be creative around new fee structures, while the other is engaged in a price war with tech-savvy firms, like Vanguard, who have worked out how to do it cheaper and, as a consequence, made fees more transparent.
The report details eight pioneering fee models, a horses-for-courses selection that highlights changes in society and the different needs of various client segments.
Matthew Jackson, director in the global banking division at Simon-Kucher & Partners, said traditional AUM models where a premium wealth manager charges a client a percentage of their assets have served the profession well but increasingly provide little link between price and value. He said that clients can still get maximum value out of a wealth manager, providing they give them the minimum threshold amount of money.
While many clients entrust more money to their advisor when they have more money, some are now wising up, Jackson said, and funnelling excess assets into low-cost options where they can minimize fees but maximize value.
He said: “The problem is the premium wealth manager is giving value – that’s not the issue. A lot of premium wealth managers think that the answer to a price war is to increase value, which is normally true, but the trouble is the pricing model is not appropriate because there is no link between price and value really.”
Jackson said the commoditization of investment management has demystified it for clients, many of whom believe it can be done much cheaper than in the past. Understanding your own profitability is, therefore, at the core of how wealth managers can develop their value proposition, he said, adding that those who don’t get this are “playing with fire”. Jackson said that developing levels of service is one way to go.
He said: “People who lose out in a price war are premium wealth managers who are giving more value than they are charging for.”
He added: “Wealth manager don’t need to go away from the AUM model but they need to get a better picture of the profitability of their clients, which very few wealth managers do. They have to think about what I am doing, how much I am doing and how much money do I need to make to deliver a certain level of service.”
A top-paying client, for example, could get the red carpet treatment and a four-man, on-call team, while a lower-paying client gets a different level of service depending on their book’s profitability.
Jackson said: “It’s up to the wealth manager if they want to play that game but, at the end of the day, if you’re not profitable, you go out of business.”
The eight fee models in the report include: The McDonald’s Menu, from Bill Simonet, of Simonet Financial, a structure than bundles services in the same way “meal deals” are done; the “Gen X” Model, from Jude Boudreaux, of Upperline Financial, which targets low-asset clients who need advice with the aim of capturing their loyalty early; and the Super-Retainer, from Steve Lockshin, of AdvicePeriod, which does away with charges based on basis points and hefty asset minimum requirements in favour of a flat six-figure sum that speaks to the value he provides.
The other models are titled: Charging By the Hour; The 3-Part Model (AUM% + Up-front + hourly/retainer; Fixed-Fee Only; The Subscription Model; and the Modular AUM-based Pricing.