Wall Street analysts sometimes describe a stock selling at a discount as a value trap. The price is lower for a reason, they say, because of problems that arent readily apparent.
Such can also be the case with RIAs who cut their fees. The difference with advisors is that they are setting the trap for themselves. Discounting to attract clients is a short-term solution to the deeper problem of a weak sales process. The long-term consequences can be a devalued brand and compromised operations.
Advisors who are new to prospecting often use discounts as a crutch, or mistakenly believe reductions will be the prime catalyst for turning leads into clients. The most extreme example Ive seen is a 100% discount in the form of a first-year fee waiver.
The problem sets in as this discounting becomes a habit, an effort to close on sales without doing the harder work of clearly articulating the value of the product, then standing firm on a price that reflects this value.
CHECK YOUR PITCH
A simple way to test if an RIA may be in danger of falling into a value trap is the venerable elevator pitch: Ask an advisor to describe in five minutes (preferably less) what he or she does and why a potential client should care. Or ask what they are doing to solve a clients problem.
If the answers consist of little more than a stammer about the founders history or a mumble about the latest investment strategy, its obvious the story they are telling about their brand is already weak. Indeed, according to a white paper on the Fidelity 2014 RIA Benchmarking Study, one of the best indicators of high-performing firms is an ability by employees at every level to consistently articulate the companys story.
Perhaps this is why so many RIAs feel threatened by robo-advisors. If flesh-and-blood advisors at a wealth management firm cant differentiate between their services and an automated system, then neither will clients or prospects -- and they will assume a discounted price reflects the value of what you are offering.
There are myriad research reports on how discounting negatively distorts customer views of a product or service. One study on luxury resort comment cards showed that the most glowing reviews came from those who paid full price, while the most complaints came from those who received a discount.
I've also seen recent research showing that discounts demotivate the customer from paying attention to the service or product purchased. This lessened attention diminishes the value of the service provided in the eye of the customer.
Think of this as the Groupon problem. How many people who buy discounted services via Groupon forget to use them before the promotional value expires? It's so many that a secondary market has developed for people to trade in the expired value of the deals. The value of these discounted services essentially hits zero as soon as the purchaser goes back to reading email and scrolling through Instagram.
Another reason to avoid discounting is that it can create serious accounting headaches, as discounts are easily coded improperly into billing systems. Discounts create unnecessary complexity that can cause problems that are hard to untangle later.
Imagine an RIA firm having to recalculate all its fees for the past two years because, to account for the discount, the operations employee hardcoded the dollar fee into the system. The discount led to a patched-up process -- and, as the market moved, the fee did not. Ive seen this very thing happen, and it wasnt pretty.
Yet another byproduct of discounting is that it can create a second class group of clients. It's not intentional, but I have seen reduced attention given to these clients in many cases. The evidence is subtle -- maybe there's just a passing comment that Its a discounted client, but you typically see fewer meetings and reports, and work that gets assigned to lower-level employees rather than senior staff.
A (VERY) FEW EXCEPTIONS
Fee reductions are not always a bad move. Advisors who cut fees during and immediately after the global financial crisis of 2008-09 seem to have won significant loyalty from their clients.
Advisors might also consider reducing fees for the so-called emerging wealthy -- generally younger clients and often entrepreneurs -- who have the potential to bring more money into the firm in the future.
In this circumstance, the discount is typically given in the form of a minimum fee waiver. The client does not yet have the assets to meet the minimum fee, so the firm waives it as the client continues to add to his or her portfolio. This can help build loyalty with clients who will benefit the firm in the years to come.
But apart from these types of very specific and special circumstances, Its caveat venditor (let the seller beware) when it comes to discounting. In other words, its a trap. But its one that, with a bit of sales discipline, can be avoided.
Yvonne Kanner is president and COO of Fiduciary Network, which provides funding to wealth management firms for internal transitions of equity, acquisitions of other advisory businesses and buyouts of retired or inactive shareholders.
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