Margin Compression, Not Fee Compression

Along the same lines, Kitces doesn’t see any sign of fee compression among advisors, citing informal BNY Mellon Pershing research that showed advisors were more likely to raise fees than lower them. Not even the advent of robo-advisors, many of which charge 30 basis points or less for asset allocation, has driven lower fees among advisors.

Instead, advisors have tried to maintain their fees while offering more services to justify charging clients a higher rate.

“It’s not a fee compression problem, it’s a margin compression problem,” said Kitces. “We’re seeing margin compression. The average has come down. A lot of firms are having trouble holding 25 to 30 percent margins. They’re bringing on more staff to offer more services and more people are doing more things. They’re hiring more sophisticated staff, they have to hire people who have CFPs, and it puts pressure on our margins. We’re seeing all that play out now.”

Kitces argued that going deeper into niche specializations and automating more services will help advisors fight the impacts of margin compression. Automation means more efficient mid- and back-office operations. Specialization means more efficient, repeatable planning processes, as the process for any one client will be similar to the process of all of an advisor’s clients if they are appropriately specialized.

Creating A Planning Experience

Advisors will also have to focus on the client experience, said Kitces.

“Client experience is not better client service, and it’s not better technology for our clients,” said Kitces. “Those are features—things we do—but that’s not what defines a unique client experience. What defines a unique client experience is something that a client does and engages in that you stage for them—that they go through and have some kind of transformative experience or process.”

Kitces points to Build-A-Bear as an example of selling an experience. A teddy bear costs $10 or so from an average retailer or online, but customers at Build-A-Bear pay up to $220 for a bear that they have to build themselves—because people will “pay at a whole different level for experience,” he said.

Build-A-Bear customers get to choose the color, texture, clothing and other elements of their bear. Though there are staff on hand to assist customers, they primarily serve as guides. Most of the work and the creative process is done by the customers themselves.