Time for wealth firms to revisit their AUM-based pricing models?

Digital competition and demographic changes are pushing traditional players to experiment with new schemes, says BCG

Time for wealth firms to revisit their AUM-based pricing models?

For decades, the practice of charging clients based on a percentage of their assets under management has been commonly accepted across the global wealth space. But that’s changing slowly and surely with the arrival of technology and changing customer expectations.

“What we see on pricing models is that banks and traditional wealth managers are not 100% moving away from AUM-based pricing models,” Anna Zakrzewski, Managing Director and Partner at BCG recently told Wealth Professional. “However, we definitely see that there is a questioning of traditional pricing paradigms.”

According to Zakrzewski, digital wealth management players are taking inspiration from technology firms like Netflix and Spotify to experiment with different pricing models. The subscription-based model, where users of a platform are charged an ongoing monthly fee to avail of certain suites of services, are a popular option for their simplicity.

Another contributing factor is a sea change in business models across the industry. While there might have been a heavy emphasis on products like investment funds in the past, traditional wealth firms are thinking more about delivering value to their clients, and viewing each relationship from a more holistic perspective.

“We have actually looked at the valuations of more traditional wealth managers and those for digital wealth managers,” Zakrzewski says. “Based on our research, digital wealth managers clearly outperform traditional wealth managers in terms of the valuation by roughly 10 times.”

While incumbent institutions still command a large share of the market, they’re not standing still either. Many traditional wealth firms are embarking on journeys of digital transformation, which have only been accelerated by the arrival of the pandemic. Others are snapping up digital wealth managers, assimilating their capabilities and talent into their own organizations.

According to Zakrzewski, it’s crucial for firms to consider service models that allow clients to flexibly add features as they please. Aside from putting clients in the driver’s seat, she says these new models should put transparency front and centre, making sure clients aren’t charged hidden fees or subject to obscure pricing schemes.

“In the future, what we're likely to see are simple pricing strategies that make it very transparent to the clients what they are paying for, and also in a way that they speak the client's language,” she says. “You could come up with a hybrid pricing model, combining asset-based pricing with a subscription-based feature, such as a flat or a tiered subscription fee for add-on services.”

Already, she says banks and wealth firms are experimenting and piloting new pricing models as they seek to stay ahead of regulation and market pressures. Simplified models like subscription-based pricing also offer a way to help firms ensure consistent revenue, as well as build trust among key client segments.

“As digital natives, millennials and next-generation clients have been primed to know what they pay for, and have come to expect value from the businesses they engage with,” Zakrzewski says. “With a large demographic transfer of wealth already well underway, the industry has to position itself to fulfill those new expectations.”