What makes someone choose a $300 pair of jeans over a $30 pair? Or a $100,000 Porsche over a $15,000 Fiat? Both options are functional and get the job done, right? Yet one is worth six to 10 times the other. Why? While some of those reasons are obvious, the underlying answer boils down to more intangible factors: quantifying quality, eliminating friction and earning trust.
Financial services faces this triple threat now more than ever — and advisers find themselves caught in the middle of more of a value war than a fee war. The obstacles take many forms: fee transparency, adding alpha, verifying value, margin compression and delivering seamless proactive service. We're all in a race to deliver Porsche-level value that is sleek and clean while charging a Fiat-like fee.
So how do advisers provide optimal value within a margin that keeps their business sustainable, all while keeping their client's interests ahead of their own?
Well, it's not a simple answer, but it begins with a mindset. One of delivering maximum value while acknowledging the realities of fee compression. For the sports fanatics out there, think of fee compression like one of those retractable, rubber T-ball stands. Or an accordion if you're the musical type.
This fee-based "T-ball stand" starts at the bottom and expands up, one section at a time: 1) trading fees, 2) index fund fees, 3) asset allocation fees, 4) active management fees, and finally 5) adviser fees. Each retractable section is contracting independently of the others, but each affects the overall height of the stand (total fees communicated to the client). The bottom of this retractable T-ball stand is compressing the most (trading fees, index fund fees, etc.), and therefore advisers feel the ripple effect of that stand shortening while they still must deal with the realities of running a business.
Our profession struggles every day with living up to the true extent of what we add to our clients' lives. At times, this is even more visible in what we help them avoid, save or reduce if they hadn't received the benefits of our advice. From the top-down on the T-ball stand, it means we must fight fee compression by delivering unmistakable value. From the bottom-up, we must look at the all-in cost of our investment models, trading fees and platform haircuts, and find strategic partners who are doing everything they can to swallow or reduce those fees, so we can appropriately do what's in our clients' best interests.
In 2018, we acquired an asset manager, QBI, to internalize their strategies and eliminate additional strategist fees while adding its factor-based experts to our ecosystem, which, in turn, benefited our advisers and the value they provide to clients. Consider firms and institutions that possess the track record, can hire the talent/support and, most importantly, can assume the risk/cost to bring added value to your clients. The more a registered investment adviser, custodian or broker-dealer can internalize these additional costs and erase fees associated with outside money managers (think of the recent news around Fidelity expanding its commission-free ETF trading), the more confident you can be in delivering on your promise as a fiduciary.
Fees always shed light on another underlying facet of financial services: trust. Most investors still mistrust advisers to some degree, and oftentimes it's because of very real concerns like fee transparency. It's also because most of us don't deliver on all three levels of trust.
At the foundational level, our clients trust we aren't going to mishandle their money, which the majority of our profession can fulfill. Second, we must act as a fiduciary, always putting our clients' interests ahead of our own. People deserve to know what's happening with their money, and it should be your mission to lead with complete transparency. I would argue most of us can deliver on these two levels.
But it's the third level most of our profession has yet to prove: our ability to anticipate the need before our clients know they have it, something I like to call seamless proactive service. This is where trust is born, where fees fall to the side as a secondary concern, and where we are truly able to delight our client beyond their expectations. ?
We have a rare opportunity to deliver value in an amazingly disruptive time in financial services and to demonstrate a noticeable impact on the lives of our clients. And we can do it in a way that doesn't force us to hide behind fees or compromise our clients' best interests.
Are you in a position to confidently offer that value proposition? Are there unnecessary fees buried in the funds, partners and platforms you work with? Is it holding you back from offering Porsche-like value for a Fiat-like fee? Only you know the answer to that question, at least for now.
The point is, soon your clients will too — and in this transparent world of advice, investors will value the adviser who values them.