What to Do About Fee Compression
Financial advisory fees are shrinking.
Last year, the average fee for new accounts was 1.02%, down from 1.04% in 2012 and 1.21% in 2011, according to PriceMetrixs fourth annual Insights report. Thats a nearly 16% decline in pricing 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, according to Cerullis Advisor Metrics 2013 report.
Fee-based advisory services are becoming commoditized. Fees are decreasing, in part, because investors access to information and expertisein the form of low-cost online platforms, for examplehas 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.
With increased competition and more options for asset management services leaving advisors without pricing power, advisors must drive more scalewhich means getting more clientsto 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 isnt an advisor but whose job is to make sure clients needs are met. This personor people if your business gets big enoughwill 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 equippedwith conferencing capabilities and customer self-service options through your website, for exampleto 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 clients 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.
Advisors who dont 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 wont be inclined to shop simply based on price.
To capitalize on their niche, advisors must build their brand by touting their authoritywith the credentials to back it up, of coursein 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.
Here are some ideas to help develop your niche:
Education. Take courses in the areas in which you want to become an expert. There are numerous professional designations and certifications you can pursue increasing your knowledge of estate planning and trusts; financial planning for divorced clients; tax planning; and more.
Networking. Network with other professionals or organizations who share your niche. If you specialize in working with divorced individuals, get to know the accountants and lawyers who work with those clients. This shows prospective clients that you understand their situation and are in a position to help. It also differentiates you from advisors who are generalists because they work with everyone.
Blogging. Keep a blog on your website offering thoughts and actionable ideas on your specialty. Even better, let prospective clients find you on the websites and publications they are already reading. If you specialize in working with clients in the medical field, try to contribute articles to the magazines and newsletters those professionals read.
Speaking. Speak to groups that would be interested in your area of expertise. For instance, perhaps a parent-teacher organization wants to hear about saving and investing for college and that happens to be your niche.
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.
Wayne Badorf, CFP, CFS, is head of Intermediary Sales for Wells Fargo Asset Management and president of Wells Fargo Funds Distributor.