Don't be afraid to raise advisory firm fees

Firms that increase their fees have virtually the same average retention rate as firms that don't, consultant says

Feb 7, 2019 @ 4:28 pm

By Jeff Benjamin

It's time for financial advisers to get over their fear of raising their fees, and a good place to start would be introducing a minimum annual fee for clients.

Eliza De Pardo, a management consultant for TD Ameritrade Institutional, said her research shows that while advisers rarely raise fees, those who do, don't usually suffer as a result.

"Advisers say they are afraid clients will leave, but clients don't actually have a problem when fees are brought up to a market rate," Ms. De Pardo said during her presentation Thursday at TD's annual LINC conference in San Diego.

According to Ms. De Pardo's research, comparing firms that raised fees over the past two years with firms that did not shows client retention rates were virtually even, at just over 97%.

The client growth rate was actually slightly higher, at 8.6%, for firms that had raised fees over the past two years. The average client growth rate was 7.8% for firms that had not raised fees.

The key to raising fees, Ms. De Pardo explained, is making sure clients understand the value that firms are providing, which can be difficult when fees are "bundled" under an asset-based pricing model.

For most firms, the primary issue is less about raising fees than it is about migrating away from asset-based fees, Ms. De Pardo said.

"Asset-based pricing reinforces investment management and it is the most empathetic model, because you are suffering when your clients are losing money," she said.

(More: Should asset-based pricing models stay or go?)

According to her research, 98% of all clients are charged under a pure asset-based pricing model, and 80% of all advisory firms indicated that their asset-based fees include services other than investment management.

"If you're an investment manager, you're probably OK with an asset-based pricing model," she said. "But if you're a wealth manager, offering all these other services, it's a different story."

(More: RIAs must move beyond investments to justify fees)

Touching on the perennial problem with asset-based pricing in that some clients will not generate a lot of revenue but might need a lot of financial planning help,Ms. De Pardo recommended introducing annual minimum fees.

Industrywide, those fees can vary, she said, but the median is $5,000 per client account.

Another advantage of minimum fees, and even hourly or flat fee models, is that it allows advisers to work with younger clients who might not yet have a lot of money to manage.

"If you're dealing with younger clients who need help with cash flow, saving for a home and insurance needs, their needs are not aligned to asset-based fees," Ms. De Pardo said. "Those younger clients are also wanting more tech services and you may not need to see them as often.The relationship will look different, the service model will look different, and the pricing model should be different."

According to Ms. De Pardo's research, 28% of advisory firms are "trending younger," meaning more than half of their clients are 55 or younger.

On the other end of the spectrum, 21% of firms are trending older, meaning more than half of their clients are over age 55.

(More: With McDonald's style menu, clients decide what they're willing to pay for)


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