Discounting To Win New Accounts Costs Advisors At Least 21% Of Their Posted Fees

Tuesday, March 29, 2011 21:47
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Discounting To Win New Accounts Costs Advisors At Least 21% Of Their Posted Fees

Tags: profitability

Fee-based advisors left their formal price structures intact during the recession but gave out big discounts to just about everyone who came to the door, but the time for discounting may be over, says sales tracking firm PriceMetrix.

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PriceMetrix didn't need to survey advisors to get self-reported -- and unreliable -- data. It simply crunched the numbers on the roughly $850 billion in AUM already keyed into its system and determined that, on average, that money is generating 1.32% a year for advisors. 

 

However, back in 2007, that same money was earning 1.47% a year -- a result of what PriceMetrix says is a typical discount of 21% to 28% that advisors are giving large and small clients alike.

 

Segmented by quartile, the top 25% advisors charged 2.01% while the bottom 25% settled for 0.81%.

 

This is not a race to the bottom, PriceMetrix says. There was no evidence that low-priced advisors stole cost-conscious accounts from their higher-priced competitors.

 

Instead, the discounting seems to be an unnecessary gesture motivated by fear. If anything, charging more helped the advisors that the company tracks open 25% more accounts over the three-year period -- and needless to say, every dollar of that added AUM was more profitable. 

 

This coincides with what pricing gurus -- like Rafi Mohammed, author of Pricing for Profit and The 1% Windfall -- have been telling me for ages.

 

The advisory business is not the commoditized every-basis-point-counts world of traditional brokerage, much less mass market retail. Clients pick advisors because they see value, not a bargain. And if they see a good fit, they're unlikely to quibble at all over pricing.

 

After all, one of the many things the typical client doesn't care about is your profit margin.

 

That said, PriceMetrix warns that it's nearly impossible to raise your fees on existing clients once they join your book, so the only way to rectify historical mistakes is to ramp up what you charge new clientele.

 

 

http://pricemetrix.com/public/pdfs/Press%20Release%20-%2003%2029%2011%20-%20Fee-Based%20Advisory%20Business.pdf

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