The good news is that wealth managers have moved to asset management fees and away from revenue tied to financial transactions. That trend has moved apiece with the ethical argument that financial advisors should not be giving advice about products that better suit their personal needs for commissions than clients’ life goals.

Unfortunately, that revenue tied to assets is really going to pinch in 2020 now that Covid-19 has arrived on U.S. shores.

According to a new report by McKinsey & Co., “The State of North American Retail Wealth Management: PriceMetrix 9th Annual Report,” advisor revenue growth has been tightly linked to asset growth. (The firm used data from its PriceMetrix database through December 31.)

“The year 2019 capped off a long bull run for clients as well as for wealth managers,” said the report. “Median assets per advisor ended 2019 at $120 million, up 8% per year since 2015, while revenues per advisor grew by 5% per year to $717,000 in 2019.”

But the firm added, “One result of asset-based fees is that in bear markets, advisor pay will decline, as 2020 will mercilessly demonstrate.”

The firm said fee-based revenue now contributes 69% of firms’ overall gross production, up from 49% in 2015, and half of the assets in the database were to be found in fee-based products, up from a third in the same time period.

Much of the growth has been coming from existing relationships as advisors try to be more holistic with the same number of clients rather than go for sheer numbers of new households. Accounts per household climbed from 2.7 in 2015 to 3.1 in 2009, the report says. The top advisors “have deeper and fewer client relationships,” said McKinsey. The top 25% of advisors had higher compound annual growth rates (8.0%), a fewer number of households and a lower attrition rate of 1% for households with more than $250,000 (the bottom 25% saw 8% attrition).

Wealth management pricing has been stable, but it’s down from 2015: The annual fee for new accounts was 1.01% for households with $1 million to $1.5 million, whereas it was 1.07% in 2015.

McKinsey reminded advisors that more clients will likely be in play in a bear market, and that 10% of the clients in the PriceMetrix data left their advisors in 2009. There was also quite a bit of discounting going on then.

“During and following the 2008 financial crisis,” says the report, “PriceMetrix observed that 17% of advisors increased their level of discounting (priced lower), and while their price levels increased after the recovery, they stabilized at a rate halfway between pre-crisis levels and the bottom of their pricing.” In other words, these advisors only clawed back half of what they lost in the financial crisis. “Sympathy pricers, as we called them, followed the market on the way down, but were reluctant to reset their pricing as quickly when markets trend upwards.”

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