Over the past several years I have heard quite a bit of anxiety from advisors over the pricing compression trend in the wealth management industry. Fees have been falling for quite some time due to a variety of factors and it is only natural to be a bit concerned. To make matters worse the “fees are bad” and “you are paying too much” marketing messages are starting gain traction with investors.
My advice to the advisors and firms that I work with is simple, don’t worry we’ve seen this in our industry and others. Any time there is pricing pressure in an industry it creates a ton of opportunity for the nimble business owners. Some advisors will panic and make unforced errors. Others will seize up and accept the fate of lower profitability. But you? You got this because you are actively thinking and strategizing about it now.
So what should you do to future proof your business? I have several suggestions.
When prices fall margins shrink if costs aren’t reduced in proportion. So, one of the first things you should do is weed out unnecessary expenses. “Unnecessary” being the operative word. It is not advisable to just start slashing away like some crazed explorer hacking away in the jungle.
If your business is like most in the wealth management industry, you probably have a lot of opportunities for improvement when it comes to efficiency. Freeing up time and human resources by leveraging new technologies and taking a fresh look a business processes often has the dual benefit of reducing costs and freeing up capacity for new clients.
Not sure where to start? Consider hiring a consultant, like Jennifer Goldman, who specializes in helping wealth management firms improve their operational efficiency.
If you expect to be making less per client or per dollar under management one path to thriving in a lower price environment is to increase the size of your client base or the amount of assets you manage. Business owners have been using the “make it up in volume” approach for hundreds of years.
There are several ways to scale your business:
When prices on your existing services and products are being compressed by the market it might be a sign that it’s time to diversify by expanding your offerings. The good news is, your existing clients will likely be open to doing more business with you if the new products or services you are offering increase the value of your relationship.
If you are only offering investment advice and portfolio management maybe it is time to explore adding life insurance, estate planning, or recruit a CPA into your business tax and accounting work.
One service area where many RIAs are too often leaving a lot of business on the table is the analysis, evaluation, and management of private investments for their clients. If you are serving high net worth individuals and families, chances are your clients will be presented with opportunities to invest in startups, small businesses, real estate, and non-publicly traded securities. Why not consider offering help in these areas? You might also consider setting up a syndicate for your clients on AngelList where you can bring deals to them and earn a 15% carry in the process.
Think about how much the wealth management business has changed over the past 25 years. When I got my start in the industry back in 1994 many “advisors” were still selling load funds aggressively. Then, as no-load funds started to gain traction in the marketplace firms shifted to fee-based accounts, wrap fees, and fee only (% of AUM) structures. Most recently, we have seen the fee-only model take over with model portfolios of low-cost index funds for asset allocation being delivered via direct-to-investor services (robo-advisors).
The way advisors make money changes over time. The fact that pricing for the management of a model portfolio is trending downward doesn’t mean you are providing less value to your clients. It just means the way you charge for your services and how you present that value to your clients needs to evolve. It might also mean that you need to re-examine what types of clients you serve.
I expect that many wealth management firms will be moving up market to serve families of higher net worth. It will make sense to incentivize clients to create extended family relationships to gain access to the premium services that your firm offers. Clients who value the white glove services and hands on attention will gladly pay for the exclusivity that goes above and beyond the results of the model portfolio.
You recognize that pricing compression is happening for some products and services. Analyze its potential impact on your business and start making adjustments.
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