Independent RIA advisors are cutting fees, recent research from Charles Schwab and AdvisorBenchmarking show. There is an obvious reason for this, say analysts: Despite the recent rebound in the market, the major indices are still well below where they were two years ago and portfolios remain depressed. As a result, some clients are disgruntled with their advisors, while most firms’ are feeling the pinch of declining asset-based fee revenue. This means greater competition to keep old clients and win new ones.
The Schwab study, “Pricing Practices in an Evolving UltraWealth Marketplace,” released at the firm’s conference in San Diego last week, shows that 33 percent of firms occasionally provide fee discounts to help them acquire business. Of those firms that do discount, 9 percent say they cut fees by over 20 percent, 32 percent cut fees by 10 to 20 percent, and the remaining 59 percent cut fees less than 10 percent.
In fact, as we noted in a story last week, financial advisors have cut average asset management fees to the lowest level in at least ten years, to 0.90 percent in 2008 from 1.11 percent in 2007, according AdvisorBenchmarking’s annual RIA study, which first kicked off in 1999. Average AUM fees fell precipitously in 2005, to 0.95 percent, the previous low, but they quickly rebounded the following year to 1.05 percent. Meanwhile, AUM fees as a percentage of total revenue declined from 86 percent in 2002 to 63 percent in 2008. Planning services for hourly or project fees accounted for just over 20 percent in 2008.
Dan Inveen, founder of FA Insight, a Tacoma, WA-based advisory consulting firm, says that he too has heard from advisors that they are discounting. Inveen says that it is usually those who can’t clearly articulate to clients the value they provide who end up caving to fee pressures from clients.
“If I destroyed somebody’s capital position and they owned Fannie and Freddie and all the poop.com and the stuff that was going to give you something for nothing, then I better lower my fees to keep them in the game,” says William Spiropoulos, CEO of CoreStates Capital Advisors, an RIA in Newtown, PA. (Spiropoulos says he is not one of the guys who invested his clients in poop.)
According to the Schwab study, 16 percent of firms think ultra-wealthy clients are very sensitive to fees, while about half (52 percent) think they are only somewhat sensitive to fees. “If (the client) earns 10 percent and I take 50 bps, they barely notice…If I give them a bill for $250,000, they’re like ‘Wow, that’s a lot,’” says a senior executive at a Schwab RIA in the report. On the other hand, 74 percent of respondents think their ultra wealthy clients would be willing to pay more than what they currently charge.
Nancy Imholte, founder of Forte Coaching, says one of her clients, who manages $100 million in assets and generates $2.5 million in revenue at an independent b/d has recently started discounting fees for current and prospective clients. But he had the highest fees of any of her clients to start with. “He said, ‘The market is down; the economy is down; consumer confidence is down. It’s not the same world,” says Imholte. “In the 1990s, he said, he would have never discounted fees, and no one ever asked him to.”
Imholte says advisors should be careful about lowering their fees, however, because it will be very difficult to raise them later on. “A reduced fee of $100 is going to cost more than delivering $100 more extra in value, so my recommendation over the last 12 months is to look for the places you can increase value, increase what you deliver. This will make clients happier and more likely to stay and give you referrals.”