Advisors add up the cost of inflation

Inflation affects financial advisors too, you know!

The July Producer Price Index (PPI) increased a less-than-expected 0.1 percent, after rising 0.2 percent in June, according to a Bureau of Labor Statistics (BLS) report released on Tuesday. In the 12 months through July, the PPI increased 2.2 percent, down from a 2.7 percent increase in June.

The S&P 500 reacted positively to the July PPI report, heightening expectations ahead of Wednesday's July Consumer Price Index (CPI) release, which edged lower than expected in July, rising 2.9% from a year earlier. Core prices, which exclude volatile food and energy items, climbed 3.2% over the previous 12 months and 0.2% since June.

Given the CPI report also shows a tempering of inflationary pressures, market-watchers believe this will open the door for Fed rate cuts and higher stock prices ahead.

But what about the costs financial advisors face on a daily, monthly and yearly basis? The ones that are not so neatly revealed in BLS reports. Are they also falling, and thereby alleviating some of the cost pressures squeezing wealth managers?

Robert Pearl, co-founder and wealth advisor at G&P Financial, says labor has been the largest increase in his costs over the last few years.

“I won’t say that any prices have fallen, but I would say that I am getting a lot more value out of my technology stack,” added Pearl. “Technologies like PreciseFP, AdvicePay, RightCapital, and Black Diamond add a ton of value to my practice, and they all continue to improve the quality of my advice and makes my team more efficient.”

Jordan Hutchinson, vice president of technology and operations at RFG Advisory, agrees, saying the increased labor costs have been one of the most direct impacts on advisors' teams due to the talent shortage in the profession as a whole.

“At RFG, we have built internal teams to help pull this burden off the advisor's practice to lean into our structure and technology,” said Hutchinson.

An area that should be considered more often is the client's expectations in the inflationary environment, according to Hutchinson. He says many clients now demand their advisors offer more services while continuing to deliver value to their clients in a rapidly changing economic climate.

“The conversation changes with cash management and investment solutions with rising costs,” said Hutchinson.

Elsewhere, Scott Lamont, director of consulting services at F2 Strategy, says technology and the cost of it is an area of constant concern for advisory practices. Licensing agreements for the technology advisors’ use have been one area of focus over the past number of years where vendors have increased their rates.

“We have seen multiple firms increase their basis point charge or per user subscription charge, as well as an increase in the cost of pretty much everything across the board. As vendor costs increase, they ultimately get passed on to the advisor,” said Lamont.

One area where there has been some incremental price improvement is data, says Lamont. With the advancement of technology, suppliers can offer lower per unit costs for the storage and management of data on the cloud.

“It remains to be seen if this results in an overall decrease in cost however, as more data is required by advisors,” added Lamont.

Finally, Chris Brown, private wealth advisor and managing director at Kingswood US, says labor costs are high, not just in terms of his own workforce, but for service and maintenance providers as well. In some cases, he believes service providers play the “inflation card” even when it may not be legitimate.

“I sometimes believe it's just an additional revenue source,” said Brown.

The good news, however, is that Brown has seen a reduction in broker dealer/RIA fees after transitioning his business to Kingswood. So he's got that going for him, which, of course, is nice.