Financial advisors shouldn't discount their fees to attract high-net-worth clients, but instead shed less wealthy clients, according to PriceMetrix.
Advisors are better off limiting the number of smaller accounts they handle in order to make time in their schedules to recruit and retain those with $2 million or more in investable assets, according to a PriceMetrix study released today.
PriceMetrix’s study, Big Fish: Understanding the High Net Worth Client, looks at the characteristics of high-net-worth clients, defined as those with $2 million or more in investable assets, and the advisors who land them. PriceMetrix provides practice intelligence solutions for retail brokerages in North America.
Some advisors mistakenly think high-net-worth investors are looking for the lowest fees available, but that is not necessarily true, according to PriceMetrix. There is a wide variation in the fees paid by this class of clients, from 0.45 percent of return on assets on the low end to 01.45 percent at the high end.
“In fact, 29 percent of high-net-worth households pay 1 percent or more in return on assets on fee accounts,” says the report. High-net-worth investors are looking for fair fees, not necessarily the lowest, PriceMetrix says.
There is even more variation in commissions paid on transactional accounts. There is a general pattern of increasing discounts on commissions as the assets increase. The median discount for a household with $2 million or more in assets is 25 percent, according to the study.
However, 27 percent of households receive no discount at all and 26 percent get half or more off the scheduled price. Two percent of high-net-worth households get a 100-percent discount and trade for free.
A deeply discounted price is not necessarily the best to attract the big clients, according to PriceMetrix. “One can price oneself out of consideration by pricing too high; at the same time, discounting too much can erode perceptions of value. The data indicate that both over pricing and under pricing result in less success with high net worth households,” the report says.
Advisors often acquire and keep households with lower asset levels in their business under the belief that some of them will grow into large accounts. PriceMetrix says this is highly unlikely and not worth the effort of maintaining the small accounts.
Only 7 percent of households started with less than $1 million and grew to more than $2 million, and only three percent began with less than $500,000 in assets. Advisors should “set aside the belief that relationships with small households, properly cultivated, will mature into relationships with high-net-worth households,” the study concludes. “Such occurrences are too uncommon to merit an advisor’s attention and resources.”
The larger the proportion of small households in a book, the smaller the number of high-net-worth households, PriceMetrix says.
To attract high-net-worth households, advisors need to make room for them, the study says. “In this respect, keeping the percentage of small households in [a practice] to less than 40 percent stands out as a key metric: The number of high-net-worth households and the production derived from them decline significantly above this point.”