Holding the line on prices is key to profitability

In these times of volatile markets, financial advisers might be tempted to cut the fees they charge their clients. Don't do it, said Doug Trott, chief of PriceMetrix, which provides practice management software for retail brokers and financial advisers. “If you're selling investment performance, it's a precarious position. Advisers should sell a process; a stewardship of assets,” said Mr. Trott. “Advisers who discount when markets are down find it difficult to get it back when markets return to normal.” Pricing discipline is one of the distinguishing characteristics of top-performing advisers identified in a white paper released today by PriceMetrix. The firm aggregates data representing 1 million fee-based accounts, 4 million transactional accounts and over $900 billion in investment assets. The study found that advisers in the top quartile had overall revenue growth of 34% so far in 2011, versus a 4% drop in revenue for the bottom quartile. In part, that was due to their ability to raise overall pricing — as measured by average adviser return on assets — by 6%. For the comparison group, pricing dropped 11%. PriceMetrix does not have the ability to track correlations between investment performance and pricing behavior. Nevertheless, keeping prices firm is a key to developing a more profitable practice. Mr. Trott suggested that top advisers continuously focus on building their lists of large-asset clients and culling their smaller less profitable ones — regardless of conditions in the market. “Advisers should establish a plan where they drop or re-price one small household client per week and add at least one large-asset household (over $250,000) per month,” he said. “And charge your millionaire clients at least 90 basis points. If you want to outperform, that's the recipe.” Another factor that distinguished top from bottom performers was higher growth in fee-based revenues. While both groups have been expanding their fee-based business, the top quartile of advisers had 29% of their client assets in fee-based products — an average growth of 21% in the 12 months ending in June. The lower quartile increased their fee-based business by 12% to an average 21% of client assets. In that period, outperformers on average opened 23 new fee-based accounts, versus nine in the comparison group. “It's probably a stretch to say that you'll be an outperformer if you have more than 25% of your business in fee-based accounts, but it is a trait of the top performers,” said Mr. Trott. He cautioned advisers not to focus on fee-based business to the detriment of their brokerage clients. “Despite the religious fervor on the fee-based side, clients are still interested in both fee-based and transactional accounts,” said Mr. Trott.