Wealth management firms need to institute a more disciplined pricing process for high-net worth and ultra-high-net worth clients, especially when it comes to non-investment services.
Here's what they can do:
Review all asset-based pricing from the existing pricing regime to review the distribution of fees as a percentage of the stated fees (i.e. a pricing “beta” or dispersion). This practice reveals discounts or below minimum clients which may no longer be justified.
Empanel a pricing committee to set and periodically adjust fees.
Institute a client acceptance process where sales, service, operations, and compliance staff are represented and any pricing variance is rationalized for a new relationship.
Prevent pricing decisions from being proffered “in the field” by any single individual.
Recognize complexity arising from the needs (and demands) of wealthy clients by “early warning signals.” Anticipating prospective service demands can allow firms a first defense against margin eroding "service creep" - that is, the continual addition of services to the client that aren't paid for.
Red flags should be raised when wealthy families have lots of advisors; lots of decision-makers; weak family governance structures; multiple generations and widely varying levels of sophistication among family members.
Other drivers of complexity include transnational families with multiple jurisdictions and domiciles; demand for information exchange, data security, information systems, and customized financial reporting. Illiquid investments and other assets including interests in operating businesses are also likely to create more service requirements.
Be wary of relationship pricing. While it may win a client mandate, relationship pricing often leads to margin erosion as families atomize into multiple households with widely varying needs and costs of delivery.
Consequently, a “household” (HH) is a preferred unit of analysis.
Be mindful of the market pricing trap – firms should be mindful of their presumptive competitor’s fees, but service platforms vary so widely that there are very few comparables.
The burden, however, remains on each firm to frame their value proposition. In the absence of a value proposition, firms forfeit any opportunity to command pricing power.
Price for non-investment services. Supply and demand suggests clients will pay for any service rendered, but this has been largely untested for services such as advanced, integrated planning; household administration, such as tax compliance and financial controls and data assimilation.
Curiously, clients don’t want nor expect to receive something for nothing, but firms have been too passive and lacked the collective will to confront this issue in the past. It needs to be tested with unbundled, stand-alone fees for these services.
Fee communication. The single best practice is a combination of openness and transparency with clients around fees. Too often, firms step gingerly around the fee discussion for fear of losing a prospective client.
Engagement letters must set out in affirmative detail a list of the discrete services that can reasonably be expected along with an acknowledgment that a firm’s cost structure and a client’s service demands are dynamic. Further, the engagement letter can set expectations that fees will be discussed and renewed annually. This is a first line of defense against the insidious cycle of service creep.
An annual engagement agreement renewal reviews what was accomplished during the prior year - both investment and non-investment experience and service delivery. Should there have been changes in service requirements and should a client desire to continue a given service, adjustments to services and fees (up or down) can be incorporated into a renewed agreement.
Fee conversation coaching. Relationship managers who carry the fee message should be confident in discussing the service delivery and fees. Coaching and articulation training is a proven payoff.
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