Fee-based financial advisers are leaving money on the table when it comes to setting their prices, according to data analyzed by software firm PriceMetrix Inc.
The company, which provides practice management software for retail wealth managers, aggregated data from 380 million transactions executed in 1 million fee-based accounts and 4 million transactional accounts, representing over $850 billion in investment assets. The data represented transactions conducted between 2007 and 2010.
“The most surprising thing to us was the wide range of prices charged for similar relationships on similar-sized fee-based accounts,” said PriceMetrix CEO Doug Trott. The average fees charged progressively declined from 1.17% on accounts between $1 million and $2 million in assets to 0.63% on accounts with more than $5 million in assets. For accounts of between $250,000 and $500,000, the lowest quartile of the advisers charged an average fee of 81 basis points, while the highest quartile charged 208 basis points.
Although service is difficult to measure in the advisory business, Mr. Trott thinks it's unlikely that the lower-priced advisers are offering service levels of one-third that of the top priced advisers. What's more, though some advisers said they make up for the low fees with higher pricing on transactional business done with the same clients, the data suggest otherwise. The transactional revenue on assets earned in balanced accounts of between $250,000 and $500,000 showed very little difference between low-priced fee accounts and the higher priced accounts.
“We conclude that pricing is not being driven by competition, because prices are all over the map. It appears that many reps are relying on hearsay from colleagues and clients in setting their fees,” Mr. Trott. said A better strategy, he suggested, is for advisers to get information from their firm's back office on the average fees charged on all accounts at the firm — and price accordingly.
The data also dispelled the myth that lower-priced advisers are stealing business from their higher-priced competitors. “Those advisers doing the most business tended to charge more,” Mr. Trott said.
In part, advisers may be “guilt pricing,” or lowering fees for existing clients to make up for perceived poor performance. This may particularly be the case when advisers move between firms and ask their clients to come with them. The telling conclusion from the data, however, is that the demand for advisory services is not price-elastic. The satisfaction and loyalty of clients is also far more dependent on the adviser's sensitivity to the client's objectives and their effectiveness in communicating with and instilling confidence in clients about the investment process.
An adviser who charges low fees, however, will find it difficult to change tack. According to the PriceMetrix data, only 5% of the advisers who raised their fees by at least 10 basis points between 2007 and 2010 did so on existing accounts. The key, Mr. Trott said, is getting the price right at the very start of the relationship.
In that period, the one-third of reps who raised their prices on new accounts by more than 10 basis points had an average price hike of 18 basis points. Surprisingly, those advisers who successfully raised their fees were already priced above their peer averages, Mr. Trott said. And more remarkable, that group of advisers opened 25% more new accounts than advisers who lowered their fees.
“This is a high-value service, not unlike what doctors or dentists provide. If you're thinking of getting some dental work done, would you go to the dentist charging 66 basis points or 220 basis points?” Mr. Trott said.
“The message from this data is that advisers should charge more.”