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Time to take a fresh look at how much you charge clients

Why hasn't pricing kept pace with changing times in private wealth management?

Jun 26, 2014 @ 9:59 am

By John Furey

fee only, commission, pricing, practice management
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Should there be a pricing paradigm change in private wealth management? The model for delivering advice in the private wealth space has seen tremendous change this century. The expansion in the independent channels has been quite acute, with asset growth, technology advances and the advent of delivering tailored client experiences being some of the most meaningful changes.

Despite the different ways advice is being delivered, few firms have taken a fresh look at how they charge for it. Since I starting working in the private wealth space, the pricing model for registered investment advisers has — shockingly — seen virtually no change. Advisers who were fee-based or fee-only predominantly charged their clients based a percentage of assets. Most advisers then choose to tier their pricing schedule based on a declining scale.

What makes this even more intriguing is the fact that advisers have been experiencing significant “shocks” to this system that should cause many of them to reconsider how they price and how pricing is related to the value proposition. Some of those shocks:

• Advisers learned that their P&Ls can be very vulnerable to market movements. In 2009, most advisers struggled to retain their markets. Fast forward to today, the markets have helped to heal wounds.

• Robo-advisers are charging a fraction of an RIA's advisory fee.

• Advisers are developing more sophisticated wealth management services but generally charge for services unrelated to investment management via an investment management fee.

• Cost structures within RIAs continue to increase but pricing has not changed at all. Unlike other industries, the private wealth space does not increase prices. In fact, as competition continues to increase, pricing is going down.

• The debate around the fiduciary standard has, in general, pushed advisers into adopting more fee-based and fee-only styles of pricing, leaving behind commission-based structures linked to products.

The origins of our current state can be linked directly to our industry's roots in investment management and financial planning. The idea was simple — link what a client pays to assets under management and interests are aligned over the long term. This seems to have served advisers and clients well but it may be an imperfect approach. Here are some examples:

• Is an AUM fee the most appropriate for ultrahigh-net-worth or clients that have concentrated equity positions? Usually these fees get negotiated down.

• What if the most prudent advice an adviser can give is shifting dollars away from fee-based assets. For example, pay off a mortgage or leverage an insurance product. An AUM fee could be a conflict for an adviser — is that truly fiduciary?

• It can be argued that most of the value a client receives is at the beginning their relationship with their adviser. Plans and strategies are developed up front, then plans are maintained. There is not a direct correlation between the value received and pricing. Clients get a great deal up front, but advisers may be the big winner over time. I have experienced this first hand with my adviser. They spent a great deal of time with me up front, but now far less. I still see value but I also realize my adviser does not have to work nearly as hard to service my family's account.

• Advisers are continuing to add new services, yet pricing is still linked and structured on investment management. Most advisers are trigger shy with regard to raising prices. Usually we only see advisers leaving wirehouses with the willingness to make a meaningful change (as they are transitioning anyway). If advisers are adding more services, why should they feel guilty about raising prices or charging incremental fees? Most advisers we have seen make changes have experienced success.

So will private wealth management pricing ever change? Not until competitive forces push AUM pricing to the point where a change must be made. Advisers that are charging a percentage of AUM and delivering investment advice and simple planning seem to be the most vulnerable.

Here are some fresh ideas advisers may consider:

• Lower asset management fees and charge flat fees for value-added services. My company knows of several family offices that work this way.

• Bundle a suite of value-added services and graduate flat-fee pricing based on size.

• Charge a planning fee for the work advisers due at the start of the relationship (e.g., estate planning, financial planning, insurance, etc.), but amortize the payments over time.

• For advisers who use declining fee structures, take the opportunity to think about if your larger relationships are actually more complex than smaller accounts. Is there a pricing remediation in order?

• Create loyalty pricing that aligns interests through tiering pricing based on tenure with the firm versus size. If you are doing a great job with your clients are accumulating assets, this has the same effect as tiering based on size.

Is it time to take a fresh look at pricing? Given existing market pressures and the constant change happening in wealth management, it's not if, but when.

John Furey is the founder and the principal of Advisor Growth Strategies, a consulting firm serving the wealth management industry. Mr. Furey conceptualized and leads the Alliance for RIAs, an independent think tank of six leading independent advisory firms.

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