Why wealth-management fee models need a change

An industry report explains three problems that popular current pricing models face

Why wealth-management fee models need a change
A hotly debated proposal to ban embedded commissions has forced many Canadian advisors and wealth firms to re-evaluate their compensation schemes, with some deciding to become entirely fee-based. But a new report suggests that current fee models also leave much to be desired.

In its new Re-wiring Wealth Management report, US-based marketing and strategy consultancy firm Simon-Kucher & Partners noted three problems with current pricing models. The three problems — comparability, exclusivity, and rigidity — are linked to extensive and upcoming industry changes.

The first problem, comparability, stems from competition with automated investment options, for which providers charge as little as 30 basis points. This has pushed many advisors to cut down their fees.

However, the report suggested they’d be better off showing what differentiates their service. For instance, more than 83% of clients surveyed placed equal or more value on financial planning compared to investment-management services. Gen X and millennial respondents also expressed interest in unconventional consulting services such as home-buying or home-selling advice, job/career evaluation, and financial education.

Exclusivity is another problem at many firms that choose to offer only fee-based advice or go with just one fee structure. The report suggested that certain fee schemes are not compatible with certain demographic groups. For example, more than 59% of respondents said they want a human relationship where they can meet with their advisors as needed; however, they said they don’t believe asset-based fee models are appropriate at that stage.

When asked what price model they preferred, 28% of respondents indicated the traditional % AUM structure, while 24% said they are partial to the rarely offered time-based rate structure. Alternative fee structures, such as pay-as-you-go or fixed monthly fee models, were also cited by more than 50% of respondents.

But according to the report, pricing models in the industry suffer from rigidity. For decades, finance-industry professionals were able to dictate what advice clients received and, consequently, how they paid for it. To survive and thrive, the report said, wealth-management firms have to become more client-centric in the services and pricing options they offer.

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