Compensation for financial advice based on a percentage of assets, and pressure to lower fees, is resulting in the homogenization of a fee structure in wealth management that is due for a shake-up, according to a recent report.
Marketing and strategy consultancy Simon-Kucher & Partners said in its “Re-wiring Wealth Management” report that there are three major problems with popular current pricing models. All three—which it summed up as comparability, exclusivity and rigidity—stem from well-known changes happening in the industry today or ones on the horizon.
In terms of comparability, traditional managers are trying to compete with lower-cost, automated investment options, charging as little as 30 basis points—a fraction of the roughly 1 percent many advisors charge. But instead, advisors should be focused on explaining to clients what differentiates them and justifies their cost.
Exclusively offering fee-based advice (or any single fee structure) could mean an advisor is better suited for one age demographic of clients, rather than all of them. For example, in the case of fee-based advice, older clients might still want a relationship with an advisor. More than 59 percent of respondents said they want to have the ability to meet with their advisors, whenever they need to, according to the report. But clients don’t think asset-based fee structures suit the relationship at that stage.
Simon-Kucher & Partners surveyed 1,096 adults in the U.S. for the report and more than 50 percent of respondents were interested in alternative fee structures such as a “pay-as-you-go” or a “fixed monthly fee.”
However, rigidity, the third pricing problem the wealth management industry faces, hasn’t allowed firms to deliver different pricing models.
Matthew Jackson, the director of Simon-Kucher & Partners Financial Services division in New York, said the fee-based pricing model is a great way for firms to make money but not a differentiator that will help grow a business.
He also said wealth managers delivering the financial planning that clients are looking for shouldn’t be afraid to charge for it.
Jackson said the price of water offers a good lesson to dispel fears of hiking costs. Water, he said, is relatively inexpensive when it comes out of the tap at home. But the same people who drink water from the faucet often don’t think twice about buying a $5 bottle of water. Today, there are even restaurants and bars that sell specialty waters for even more. Customers are willing to pay for convenience and better products, even when cheaper options are available, if they see the value.
The report also found that clients place a high value on financial planning and ongoing support services. More than 83 percent surveyed valued financial planning equally or more than investment management services.