The financial planning profession is in danger of succumbing to a price war if not led bravely by those who have the most to offer.
As pricing specialists Simon-Kucher note, “We’ve seen time and time again that industries on the brink of price wars can be saved through “value warriors”, who understand the worth of their proposition and charge appropriately and transparently.”
“Robo-advice” services are yet to affect financial planners as once predicted, but what they have done is force businesses to become clearer about the value they bring to clients.
Around the country, advisers are engaging in behavioural coaching workshops and conferences, believing that their most valuable contribution to client relationships is the ability to influence behavior under uncertainty. As large parts of the investment management process get commoditized, developing the skills for real human connection will be the key to advancing our profession.
Unfortunately, this value proposition is incongruent with how fees are currently calculated. This makes our work more difficult than it already is.
It’s simple. Clients love transparency and a clear articulation of value. RDR is bringing greater transparency. As a result we will need to express our value more clearly. But consumers also love fairness and choice. This means that greater flexibility and different fee models are likely in the future.
The current AUM-based fee model is better than what we had before. The fee is reasonably transparent and easy to calculate. The adviser and client’s interests are more closely aligned, but when fees are expressed in Rands and Cents rather than percentages of AUM the pressure on showing value will increase.
So, in the current environment of growing fee-pressure there are a few reasons to expect that the AUM-based model will change:
- It does not effectively reflect the true value delivered. Two clients with differing asset levels can pay vastly different fees for effectively the same service.
- The model relies on wealthy clients to finance the majority of the client base, which often includes a large group of unprofitable clients. Given the introduction of choice, there is no incentive for wealthy clients to keep doing this.
- It does not cater for clients who are yet to accumulate the minimum asset level, but are willing to pay a fee for advice. These are typically younger clients who will become tomorrow’s target market.
- Under the scrutiny of fee-sensitive consumers, it leads to unfair comparisons with other investment-focused services. If an investment manager is charging an AUM based fee for managing a client’s money, why does a financial adviser have the same model?
The AUM-based fee model may continue to work for businesses serving retired clients who all require the same service. But even here the wealthier will subsidise other clients.
For the large group of consumers who fall outside of this group, choice seems inevitable.
In “The Future of Fees”, Simon-Kucher examines eight new fee models for wealth management that have been implemented successfully in the US by forward-thinking practitioners.
The diversity in models reflect the need to appeal to a wide range of non-traditional segments.
In contrast to the current model they:
- recognize that the complexity of a client’s situation should be a fee driver,
- offer choice as a way to differentiate value and price, and
- understand that there needs to be a coherent story around the fee calculation.
The range of fee models suggest that there will be no one “new fee model”. The future will simply be more diverse, allowing our profession to profitably serve different client types with different value and fee models.
Most importantly, any new fee model that an adviser adopts needs to align the value provided to the fee being paid, and needs to suit the market being targeted. This is not about finding the “right” fee model. It’s about finding one that works best for the specific client group you are serving.
As Simon-Kucher concludes, “Moving to a new pricing paradigm will not be easy, but it is possible to take note, heart, and insight from entrepreneurs who have walked the walk and are blazing a trail for the future of financial advice."
This article was first published in Blue Chip Journal.