In a June article titled “What to Do About Fee Compression” which was directed to advisers and planners, Wayne Badorf of Wells Fargo Asset Management offered some interesting ideas.
“Last year, the average fee for new accounts was 1.02%, down from 1.21% in 2011. That’s a nearly 16% decline in pricing power in two years.
Meanwhile, financial advisors are projected to grow their assets by just a third of that, or 4.7%, from 2012 to 2016.
Fee-based advisory services are becoming commoditized. Fees are decreasing, in part, because investors’ access to information and expertise—in the form of low-cost online platforms, for example—has increased.
Greater access to free or low cost information and expertise makes it harder for investors to distinguish the value of one advisor from another. Investors shop around based on fees, further driving down those prices.
But cutting expenses alone may not be enough for advisors to offset the fee decline. At best, advisors could expect to maintain their revenues, but perhaps not for long.
Financial advisors who want to grow their revenues essentially have two options: go bigger or specialize.
GET BIGGER
With increased competition and more options for asset management services leaving advisors without pricing power, advisors must drive more scale—which means getting more clients—to replace lost revenue.
To get bigger, advisors must think of actively marketing their practices, offering new products or services or determine what they can do to enhance their existing service and elevate the client experience.
Here are some ideas:
Team up. Form a team through a formal business partnership to cover areas and provide services that are beyond your expertise or capacity to offer. One advisor could do the insurance and protection planning work while another could handle the asset allocation and another could be the rainmaker, bringing in new clients.
For advisors who don’t care to permanently team with another advisor, they may choose to work with an advisor who has a complementary expertise on a case-by-case basis.
Merge. Advisors could also think of merging with another firm, though they will give up the autonomy they may enjoy in running their own practice. But, advisors who do nothing, except perhaps cut costs, might find this decision has been made for them when they are taken over by another firm.
Infrastructure. One challenge to getting bigger is ensuring that you have the appropriate staff and infrastructure in place to do so.
Relationship Manager. On the staffing side, make sure that your best clients get the best service and have the most access to senior advisors. You might want to have a dedicated client service professional who isn’t an advisor but whose job is to make sure clients’ needs are met. This person—or people if your business gets big enough—will know every aspect of the business and can immediately respond to clients’ needs. Clients will take comfort in knowing that their quick, simple needs will be met right away, while more complex matters will be escalated to the advisor.
Technology. On the infrastructure side, you’ll need to consider technology to make sure you are equipped—with conferencing capabilities and customer self-service options through your website, for example—to serve more clients.
Discretionary Accounts. One way to add new products is to work with your firm to gain the ability to work on discretionary accounts if you do not already do so. With discretionary accounts, advisors form an investment policy that the client agrees to and then the advisor is permitted to buy and sell securities without the client’s prior consent on every transaction.
Liquidity. Another way to be more full-service, without specializing per se, would be to offer to liquidity solutions, such as money markets, in addition to long-term money management services.
SPECIALIZE
Advisors who don’t want to get bigger, or find that getting bigger is too much work, must find a specialization and make sure they are known for it.
Some advisors work with divorced clients; the parents of children with special needs; or employees who all work in the same industry or even for the same company. Whatever the specialty, having an area of expertise means that certain clients will value the advisors’ services more and they won’t be inclined to shop simply based on price.
To capitalize on their niche, advisors must build their brand by touting their authority—with the credentials to back it up, of course—in that particular area.
And to validate their area of expertise, and gain the most pricing power, advisors must be willing to meet with prospective clients themselves rather than delegating this important meeting to another advisor or member of the support staff. If you say you are an expert in estate planning for example, prospective clients will want to talk to you in advance of giving you control of their life savings, much less generations’ worth of assets.
And for advisors who want to both get bigger and specialize, it’s usually a matter of having the necessary infrastructure in place to deliver expertise to a larger client base.”
None of these suggestions is illegal, immoral, or unethical. It’s a simple matter of maximizing compensation. Or in this case, minimizing the decline of compensation. But changes like these will have an impact on you, unless you are fortunate enough to be among the very top clients of the firm you use. If you are, you can expect a continuation of the red carpet treatment. But if you’re part of the other 95% of clients, get ready to see the amount of attention and the quality of service suffer. It’s simple math. More clients for the same number of advisers means less time and attention for each client.
But take heart. You can always elect to move your account to a discount firm and manage your investments yourself. If you would like to explore what’s involved in making such a move, drop me a line or call me. I don’t charge for an initial consultation, and I’ll try to give you a good sense of what it would take for you to break free.