Advisors Must Face A New Reality For Fees

A few weeks ago, Fidelity Investments released research from its 2017 “Benchmarking Study,” which indicates 64% of RIAs are discounting their fee schedules to win new business. I recently had a conversation with a large RIA. The people at this firm asked me to help them defend their price schedule and reduce the need for discounting. My answer may have been disheartening to them.

Pricing Power Shifts To Consumers

An advisor may call it “discounting,” but what he or she is really doing is acknowledging that the set point between the fee schedule and what new clients are willing to pay has changed. In the investment business, we know that all price is based on a bid and an ask, and when they match, the deal is done. Consumers have changed in both what they value and what they are willing to pay for. Look at how they have taken hold of the pricing power in other situations—in car buying, hotel reserving, shopping on Amazon, even in finding insurance rates. They have more information and more choice in those industries, and now it’s our turn in the RIA space to face that new consumer power.

In addition to the Fidelity report, just look at the example of more than $30 billion of inflows Vanguard received last year for its hybrid offering. Some scoff that many of these inflows were from Vanguard’s own clients electing to use the new service, but the fact is that people sensitive to prices, including many retirees, tested out the service—and found it’s just fine! It’s awesome for 30 basis points, and it may get even less expensive now that Vanguard has signaled to the press it will take prices lower.

The Price War Is On

Where Vanguard goes, Fidelity, Schwab, TD and others will surely follow with their own hybrid service models. They will all put marketing dollars behind these offerings, which will simply bring price to the forefront of our industry. The distance between 25 basis points and 100 basis points is real money—especially to those using wealth management fee deductions, which are now more limited after the recent tax reform.

It’s easy to see how investment management can be commoditized, but a lot of advisors hang on to the idea that planning and guidance are bespoke and valuable services. Perhaps fees should be segregated so that advisors can be more specific about what clients pay for investments and for advice. That’s one way to defend a fulsome 1% wealth management fee, but only to a point.

Changing The Whole Pricing Model

My advice to advisors is to make sure you have a strong, clear message and that you make the touch points of your advice relationship very tangible. I do like the idea of one specific fee attribution for investments and another for advice, so it’s worth trying. Focus on a “wow” client experience and be ready to articulate to clients what they get for their annual fee.