Adviser pricing transparency is coming

Fee comparisons welcomed by some; others fear low-balling

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Apr 8, 2012 @ 12:01 am (Updated 10:22 am) EST

Faced with a dearth of reliable data on the fees and commissions being charged for advisory services, many financial advisers are basing their pricing structure on little more than their gut.

Given that fact, adviser reaction to Morningstar Inc.'s announcement last week that it will begin incorporating adviser fee and commission data from PriceMetrix Inc. in its Morningstar Advisor Workstation platform has been generally enthusiastic — although many advisers are concerned that greater transparency may lead to lower pricing.

“It is good for transparency purposes, but with a pricing model that continues to decline, there could be a temptation to say that we charge only 85 basis points, and the rest of the market charges more,” said James Crosson, a financial consultant at Investors Capital Corp.

“If competition comes into play, advisers could be at 1% now, and in five years be at three-fourths or half a percent,” he said. “I don't want to see the business going to Wal-Mart territory.”

PriceMetrix, which aggregates data for the retail-brokerage industry, backs up concerns about falling fees with hard numbers, finding that advisers' average fee-based return on assets slipped to 1.19% in 2011, from 1.21% in 2010.

But the detailed pricing information offers insight into attributes that clients are willing to pay for, such as overall size of the firm, management style and asset mix, according to PriceMetrix. The firm's executives said that their data don't indicate that higher-priced advisers are losing business to discounters. In fact, the typical adviser could be charging about 9 basis points more, based on their analysis of the data, which underscores the need to conduct pricing comparisons.

COMMISSIONS PRICED BETTER

Last year, the firm collected data on 3 million investors, including more than 1 million fee-based accounts, 4 million transactional accounts, 500 million transactions and more than $900 billion in investment assets.

Commission revenue was in slightly better shape than fee-based revenue, the company found, with the average discount from a firm's list price for an equity trade at 35% in 2011, down from a 38% discount in 2009, although the number of equity trades per adviser fell.

“It's not uncommon for advisers to ask us for insight on how to price their services,” said Nick VanDerSchie, vice president of the software group for Morningstar's captive-broker-dealer channel. “We don't want to make a recommendation on how they should price; we just want to give them data so they can make decisions relative to their value proposition.”

Many advisers simply haven't looked at their pricing model for a long time, which means that many don't have a clear picture of how current costs relate to a structure created years ago, said Eric Golberg, vice president of wealth management at Loring Ward, a portfolio management firm.

“The time is ripe for advisers to look at the data and do comparisons between similar advisers,” Mr. Golberg said. “I believe a lot of them are underpricing smaller clients that may cost them more to serve, and then potentially are overpricing some of their very large accounts.”

Investors are more price-conscious than they used to be, but they are willing to pay more if they believe they are getting a good value, Mr. Golberg said.

INVESTORS WANT MORE

“If you are doing nothing other than re-balancing and having an annual meeting, and you charge 1% for that, they will look for alternatives,” he said.

On the other hand, he said, advisers who have expanded into a wealth management business model over the years and act as a steward of the client's overall wealth “may be underpricing, because the value is so much more than it was five years ago.”

A former wirehouse broker said he hopes advisers will share pricing data with their clients in the name of full transparency.

“I left the wirehouse to get away from hidden fees,” said Derek H. Holman, managing director of EP Wealth Advisors Inc. “Advisers should already be articulating what they charge.”

Mr. Holman's firm charges a top fee of 1%, which is lower than the national average.

MARKETING TOOL

“At the end of the day, I think the information will be used as a marketing tool against higher-priced advisers,” he said. “I would be concerned if my adviser was reluctant to provide this information.”

A Bank of America Merrill Lynch broker, who asked to remain anonymous, would like to see the comparative-pricing data become more available, as long as it is clear which accounts are fee-based and which are commission-based.

“The more transparency [for clients], the better,” he said. “You want to be competitively priced. You don't want to give it away or put too high a premium on it.”

Diane MacPhee, a former registered investment adviser turned business coach, said that many of the advisers she works with struggle over the decision of whether to charge a flat retainer or a percentage of assets.

Many have a difficult time determining how much to charge, she said.

Ms. MacPhee, owner of DMac Consulting Services LLC, said she isn't sure that comparative-pricing data will offer much help to advisers.

For the most part, she said, many advisers are aware of pricing norms from industry surveys. She believes that advisers simply settle on a base fee of 1% of assets because that is the most common base fee among their peers.

Those who set a retainer find it even harder to come up with a number, she said.

“It is not a precise science,” Ms. MacPhee said. “Many throw a dart against the wall to get at what sounds like an appropriate retainer.”

lkuykendall@investmentnews.com