Triggered by the growing demand for greater value, the financial services industry is creating new categories of products and services that never existed, expanding access in ways that were never expected, providing greater transparency and simplicity — and driving down costs to unprecedented lows.
Clients benefit and this is clearly a good thing, as these costs savings go right back into their portfolios or straight into their pockets. But this race to the bottom for fees and expenses places significant pricing pressure on advisors. Fee compression is pushing downward — and the vast majority of advisors are feeling the pain. According to Nationwide’s most recent study of more than 1,700 advisor and individual investors, the vast majority of advisors (69% of RIA and fee-based advisors, and 79% of wirehouse and broker dealers) are concerned about the impact of fee compression on their business over the next 12 months.
As a result of fee compression, advisors are likely to see larger firms win by leveraging scale to cut costs and create greater efficiencies. They are also likely to see more acquisitions, as firms look to gain a competitive edge by increasing their size and scale. And advisors of all sizes will be forced to reengineer their current business models to remain viable. This is a watershed moment, as advisors will either join in this race — or be forced out.
So what factors are influencing fee compression and how can advisors keep pace?
The vast majority of RIAs and fee-based advisors say technology will have an impact on driving more fee compression over the next 12 months. As everything now moves at instant Internet speed, as more households are wired and as mobile technology becomes near ubiquitous, it continues to disrupt and disintermediate the financial services value chain, cutting the time and the costs to near zero for transactions such as online trading, tracking market moves, making bank transfers and peer-to-peer payments.
Likewise, asset management continues to become more commoditized with the growing use of robo advice. An increasing number of advisors, including the most successful, and numerous investors at every level of net worth, rely on these digital solutions for at least some portion of their portfolio allocations. In fact, A.T. Kearney estimates the robo industry as a whole managed roughly $30 billion in 2017 and will attract more than $2 trillion by 2020.
Technology is a cause of fee compression. But it’s also a solution. You can’t win without it. It stands to reason that in this fast-paced environment, best of breed technology is now table-stakes for the advisory business. In fact, the most successful RIAs and fee-based advisors — those who earn over $500,000 per year from their advisory business, or individually manage AUM of $250 million or more — choose to invest more in technology and use more technology, when compared to the typical advisor, according to previous editions of our study.
Advisors are using technology to refine their practice, enhance investing and advising capabilities, and ultimately serve clients more efficiently — and more profitably — at every point in the relationship.
Technology empowers them with more tools and information, allowing them to employ more sophisticated risk management, to customize solutions across a wide range of client needs, to consolidate disparate data from multiple accounts and provide more holistic advice — all without additional staff or administrative burdens.
To keep pace as fees race to the bottom, you need to enhance the fintech factor — on the front end and the back end — to keep your own costs low, as you cut costs for your clients and meet their demands, head-on.
As technology drives down costs, and as the move to an independent fee-based fiduciary model heats up the competition, pressure is mounting. Facing these complex dynamics, it’s important to remember that advisors can’t win on performance alone.
To justify fees, you need specialized expertise that aligns with your client needs. For example, consider becoming the trusted counselor on market volatility, protecting clients from reacting to their emotions during challenging times and keeping them on track with their long-term financial plans. Become the subject matter expert, developing a unique specialty in serving clients based on their generation, profession or lifestyle. As many experts in our industry say, the advisor who tries to serve all clients end up serving no one.
To rise above the race to the bottom, our study has consistently shown that a key to attracting and retaining clients comes from leading with customized offerings, combined with holistic financial planning and putting the client’s best interest first.
Finally, to beat fee compression, advisors must also create the competitive advantage of a unique customer experience. As our research has shown, more than 90% of all advisors say that customer experience is vital to their value proposition. They say that customer experience is the key to unlock client acquisition, satisfaction and retention. It is also fundamental for the growth and health of a profitable practice—and is expected to increase in importance.
To make the experience work, both advisors and investor say trust is the single most important attribute. They agree that quality of communication and a personal one-on-one relationship are key for success. And while there is no question that technology will continue to grow in importance, advisors and investors also agree that that technology is no replacement for the human touch — and nothing can replace face-to-face. Striking the right balance between tech and high touch is more important than ever.
While some factors may be out of our control, you and your clients will benefit if you take control of what you can.
Start by re-tooling your practice and making the investments in technology to keep your own costs low, as you cut costs for your clients. Recognize clients’ demands for customized offerings and holistic planning that puts their best interests first. Specialize by becoming the trusted expert who knows their unique needs, stays a step ahead in tough times, and stays focused on the long-term. Attract new clients and retain current clients with the competitive advantage of a unique customer experience built on trust, quality of communication and a personal one-on-one relationship. Find the right balance between tech and high touch to ensure you have time to focus on what matters most: your client.
The race is on. Fee compression will inevitably increase and there is no turning back. Innovation will continue to surge at an unprecedented pace, driven by the digital economy, technological innovations, regulatory changes and the power of consumer demand. You can win by recognizing that these very same trends are not your obstacles—but are your allies—as fees continue their race to the bottom.