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Loss Leader Strategy Usually A Loss For FAs

Loss Leader Strategy Usually A Loss For FAs

Many advisors say they may discount on their fee-based practice, but they make up for it on the transactional side of the business. It’s a good strategy, if that's what they were actually doing.

A new report from PriceMetrix found that the so-called “loss leader” strategy is applied inconsistently and therefore, advisors did not reliably recoup those discounts.

 “We hear advisors say all the time that they recoup revenue given up on their fee-based business through their transactional business, as well as the reverse,” says Doug Trott, PriceMetrix’s president and CEO. “This could be an effective strategy, if that’s what advisors really did.”

The study showed that advisors needed to take a closer look at their books, as many were not consistently pricing at a premium on one side of the business in order to make up for the discounts on the other side. 

But the biggest find is that the loss leader pricing strategy, while not implausible, is far from the prevailing pattern of behavior in the market, Trott says. PriceMetrix found that 21 percent of advisors trade off fee for transactional revenue, while 21 percent trade off transactional for fee revenue. But more frequently, advisors price both sides of the business, either at a premium (29 percent) or at a discount (29 percent).

 “We find that advisors are more likely to be consistent in their pricing, either high or low, across both fee and transactional business, although, to be sure, a wide range of pricing behaviors is also evident,” Trott says.

Bottom line: the loss leader strategy may work, but only if—like all pricing mechanisms—it’s applied consistently. Not to worry though, while advisors may say they are using this strategy, it’s not the dominant business practice. 

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