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2012 Wealth Management Preview: Fear and Uncertainty Forcing Rethink of Fees and Pricing

Fearful investors and economic uncertainty are expected to put wealth management revenue and profits under pressure this year, resulting in a re-evaluation of fees and pricing strategies, according to top executives and industry experts.

The anemic economy is causing clients to reduce their expenses, putting downward revenue pressure on financial service providers, say wealth managers.

“With so much economic uncertainty, clients cannot make long-term investing decisions based on short-term policy direction,” said Pat Mendenhall, chief executive officer, of Houston-based U.S. Capital Advisors, which has $2.3 billion in assets under management. “It’s also very difficult to do proper estate and wealth planning.”

The European debt crisis is seen as particularly troubling to clients and a major stumbling block for the industry this year.

In fact, European financial uncertainty is “the most pressing issue facing the wealth management industry in 2012,” according to Kim Ip, partner, at Luminous Capital, the Los Angeles and San Francisco-based wealth manager with $4.7 billion in assets under management. “Should Europe escalate into a crisis, it will have a short-term impact on profitability as we focus exclusively on our current clients, deferring any growth initiatives,” Ip said.

Nor are wealth managers looking forward to the continued market volatility spawned by economic uncertainty.

“U.S. investors are incredibly impatient and desire to make as much or more than the market, and lose much less when the market goes down,” said Steve Lockshin, chief executive of Potomac, Maryland-based Convergent Wealth Advisors, which has over $7 billion in assets under management. “Lots of volatility without positive results creates lots of turnover; and that's expensive for everyone.”

Scott Welch, senior managing director for Fortigent, the Rockville-Md.-based outsourced wealth management platform provider that works with approximately 90 wealth management firms and was acquired by LPL Financial yesterday, agreed. “I think there will continue to be wild volatility in the markets, much of it driven by Europe, and I don’t anticipate a solution anytime soon or one that is good,” Welch said. “This uncertainty is going to keep some people out of the market, and that’s not good because the typical wealth manager charges based on assets under management. If they have a hard time keeping people invested it will impact their revenue and profitability.”

Services Scrutinized

As a result, wealth management service models, fee structures, margins and pricing are expected to come under intense scrutiny in 2012.

“Wealth managers will need to focus on ways to expand client relationships by providing more, and different, services, such as consultative advice, expanded investment opportunities and banking solutions to remain relevant and appropriately compensated,” said Doug Regan, president, of Chicago-based Northern Trust’s Wealth Management Group, which has $32 billion in assets under management.

So-called “soft-side” services, such as running family meetings and offering next-generation counseling and education, will become more important than ever, say wealth management and family office executives. “Clients need to fully understand the value of this advice, know it is easily accessible to them from their advisor, and then appreciate the value,” said Murray Stoltz, president of Manchester Capital Advisors a multi-family office based in Manchester, Vermont with assets of $1.7 billion.

Indeed, provider fees will increasingly be scrutinized, said Steve Barimo, chief marketing officer of Palm Beach, Fla.-based GenSpring Family Offices, which has over $10 billion in assets under management. “Results must be tangible and, to some degree, quantifiable. Measuring ‘value -add’ will not be a one-time or one-sided exercise for clients and their wealth management firm,” Barimo said. “It will be an exercise that requires wealth management firms to profitably tailor their services and pricing to the specific needs and requirements of each client.”

Wealth managers are also facing a new world in which clients are moving more slowly.

“Prior to the collapse of Lehman Brothers and the Madoff scandal, clients were more willing to switch managers and move assets after conducting the necessary due diligence,” noted Steve Prostano, chief executive of Boston-based Silver Bridge, which has approximately $2 billion in assets under management. “Today, clients want to test you out and see if you will be a fit with their family long-term, a process that can take months even years to cultivate. This has resulted in more project and fee-based work and ultimately impacts the profitability and market share of many wealth management firms.”

New Pricing Protocols

Ultimately, wealth managers will be forced to confront their pricing strategies more than ever this year, according to Jamie McLaughlin, a veteran industry executive and now a management consultant to banks, RIAs and single and multi-family offices.

“Wealth managers will need to right-size pricing and over-haul pricing disciplines in the face of increasing complexity for non-investment services,” McLaughlin said. “The current ‘arms race’ to expand the service offering is unsustainable. Firms need to be more alert to the insidiousness of complexity and how it can systematically erode their margin, although improved pricing protocols and ‘best practices’ are emerging.”

While firms have traditionally subsidized non-investment services using investment fees, McLaughlin, who concluded and exhaustive industry-wide study last year, believes that is changing.

“My sense is that demand has shifted and families will pay for non-investment services as they increasingly rank those services as high value prerequisites in their choice of provider,” he said.

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