Are you earning just 25 bps for your services while fee-based advisors earn 3–4 times as much? If so, it’s time to get paid what you are worth.Over the past decade, there has been a pronounced shift away from traditional, commission-driven business and toward a fee-based model where clients pay an advisory fee based on the value of their account holdings. According to data from PriceMetrix, the percentage of industry assets in fee-based accounts rose from 20% to 31% in the past five years (Figure 1). In addition, fee-based revenue jumped from 43% to 47% between 2011 and 2013, while the number of fee accounts per advisor increased from 85 to 101 during the same period.
The data clearly shows that fee-based accounts are more profitable to the financial industry, as they represent 31% of total assets but garner 47% of total revenue. What is at the center of this sustained trend toward the fee-based model? Increasingly, clients are in need of advice, and advisors who embrace the fee-based model have adapted to that need.
The growing prevalence of the fee-based model also coincides with the downward trend in pricing for fee-based accounts. Between 2011 and 2013, average RoA for fee accounts dropped from 1.14% to 0.99%, and average RoA from new fee accounts decreased from 1.21% to 1.02% during the same time period. This trend toward lower fees can be attributed to a rise in fee account assets, which jumped from an average of $258K in 2012 to $293K in 2013. The downward trend also reflects the lower RoA typically generated by larger clients.
What’s Your Value?
As the transition away from A share funds and commissions accelerates, how does it impact your value? Let’s say you’re managing A shares directly through the fund company and earning 25 bps or less. Your business efforts largely focus on servicing existing clients instead of acquiring new ones. In this scenario, is it even possible to have both a profitable business and satisfied clients? It’s a challenging tradeoff: either your clients don’t get a high level of service or you earn less after your cut and your business expenses.
Most likely, your existing clients still rely on you for your advice. The question is: are you getting paid for it? If you’re not being paid for the work you really do for clients, if you’re not doing the work you want to be doing for your clients, it’s time to consider another model.
Finding the Balance
At this point, you may be asking: if I’m charging too little for my services, how do fee-based advisors find the right balance in charging for their services?
Based on their high retention rates, we can assume clients are generally satisfied with their fee-based advisors. However, it holds that charging too much for your services leads to lower client retention. If you’re too expensive, clients have an array of other competent providers to choose from. On the other hand, charging too little can also lead to lower retention. If you’re a low cost provider and that is your value, you’ll lose the business as soon as a lower cost provider comes along. After all, “robo-advisors” and advisors just starting out take what they can get.
Investors have shown their willingness to pay a premium for fee-based programs. Based on our experience working with fee-based advisors, we believe this model forces an advisor to define the value proposition that will be delivered. This value proposition is what sets the advisor apart in attracting new clients and continuing relationships with existing clients. Which once again leads to the question: what’s your value? Are you ready to take the next step towards defining it and earning your true worth?