Stop Leaving Fee Based Dollars on the Floor

Wednesday, October 26th, 2011

Stop leav­ing fee-based dol­lars on the floor

One of the impor­tant trends among suc­cess­ful advi­sors over the past decade has been the shift from a busi­ness whose rev­enue model depended on com­mis­sions to one based on annual fees.

A recent research report pro­vides impor­tant insights on get­ting the level of fee pric­ing right, one of the keys to mak­ing a fee-based approach work.

The big pic­ture on fee-based business

At the end of Decem­ber, the aver­age advi­sor at US and Cana­dian full-service secu­ri­ties firms had 25% of assets and 37% of rev­enue in fee-based accounts; 80% of advi­sors had at least 5% of assets in fee-based programs.

Over the last four years, the typ­i­cal advisor’s fee-based assets are up 24%, at a time when non fee-based assets were down slightly. The aver­age advi­sor opened just under 15 new fee-based accounts in 2010, up from 12 accounts in 2008 — over 80% of these accounts were with new relationships.

These are some of the find­ings from the most recent Insights whitepa­per by invest­ment indus­try soft­ware firm PriceMetrix. This report fea­tures data from 15,000 advi­sor books at a broad range of Cana­dian and US firms; these advi­sors worked with over 2 mil­lion investors rep­re­sent­ing assets of $850 bil­lion (so an aver­age account size of $400,000.)

Note that the firms PriceMetrix works with tend to be full-service secu­ri­ties firms, so the actual num­bers may dif­fer from advi­sors with other busi­ness mod­els, although the over­all trends should be.

What’s dri­ven the move to fee-based

There are a num­ber of rea­sons for the growth in fee-based accounts.

Start with the fact that a fee-based approach leads to bet­ter align­ment of inter­ests. For investors it can reduce con­cerns about poten­tial con­flicts and whether a rec­om­men­da­tion to buy or sell is moti­vated by the advisor’s desire to gen­er­ate a com­mis­sion. Fur­ther it elim­i­nates client anx­i­ety about not get­ting a fair price if they don’t hag­gle about com­mis­sion levels.

For advi­sors, fee based-business escapes the com­modi­ti­za­tion trap on com­mis­sions and matches rev­enue and effort — good advi­sors pro­vide ongo­ing, reg­u­lar com­mu­ni­ca­tion and advice to clients and a fee-based approach reflects that.

Finally, fee-based busi­ness pro­vides pre­dictable rev­enue. One of the key things that dri­ves long term value in a busi­ness is “recur­ring rev­enue”, the fact that once an ini­tial sale is made, pro­vided that you do a good job, addi­tional rev­enue can be relied on. This is noth­ing new — Gillette built a great busi­ness based on giv­ing away razors and then mak­ing money off razor blades.

For advi­sors look­ing to enhance the long term value of their busi­ness, recur­ring rev­enue is key — that’s why some advi­sors who were his­tor­i­cally trans­ac­tion ori­ented have sat down with clients, shown them how much they’ve paid in com­mis­sions over the past few years and sug­gested a fee below the com­mis­sion level clients paid in the past, fore­go­ing some rev­enue for sta­bil­ity and predictability.

Get­ting fee-based pric­ing right

Per­haps the most crit­i­cal ele­ment to a prof­itable fee based busi­ness is get­ting pric­ing right.

Three obser­va­tions on pric­ing from the PriceMetrix research:

1. Under­pric­ing of small and mid-sized accounts

Aver­age rev­enue from client house­holds with assets of $500K to $1 mil­lion is two to three times that for clients with $100K to $250K.

Even account­ing for higher com­mu­ni­ca­tion and ser­vice lev­els for larger clients, it appears that advi­sors are either under­charg­ing smaller clients or over­charg­ing larger ones.

Here’s the aver­age pric­ing for accounts at dif­fer­ent lev­els of house­hold assets:

Take­away One:

Advi­sors need to scale pric­ing so that it’s fair to clients of all sizes and to set min­i­mum lev­els of rev­enue per household.

2. Wide dis­par­i­ties in pric­ing for sim­i­lar clients

Fees for sim­i­lar accounts var­ied widely across advisors.

Here’s the dis­tri­b­u­tion of pric­ing to clients with assets of $250K to $500k in bal­anced accounts — note that the over­all aver­age price for this group 1.39%.

Of note, PriceMetrix didn’t find any cor­re­la­tion between pric­ing level on the one hand and geo­graphic loca­tion, other rev­enue from clients or suc­cess in win­ning new accounts on the other. The only appar­ent vari­able is the advisor’s busi­ness model and going in think­ing on pricing.

Take­away two:

Advi­sors need to be clear and con­sis­tent on their approach to fee-based pric­ing; as part of that, more atten­tion needs to be paid to mar­ket pric­ing and what other advi­sors are charg­ing for sim­i­lar accounts.

3. Get­ting ini­tial pric­ing right

Once a pric­ing level is set, it is incred­i­bly dif­fi­cult to raise it — only 5% of advi­sors saw a mean­ing­ful increase in pric­ing lev­els with exist­ing accounts. That means it’s of para­mount impor­tance to get the ini­tial pric­ing level on a fee based account right. To do that, you have to be crys­tal clear about your pric­ing going into client con­ver­sa­tions — and be com­mit­ted to main­tain pric­ing lev­els across your book that are con­sis­tent and fair both to you and to clients.

Take­away three:

You need to get ini­tial pric­ing on new fee-based accounts right. As part of that, you have to be crys­tal clear on the value you’re providing.

Two ingre­di­ents to build­ing a fee-based business

There are at least two keys to mak­ing fee-based busi­ness the foun­da­tion of your busi­ness going forward.

First is to focus — the advi­sors who are see­ing the most suc­cess are those who are adopt­ing the fee-based model as the foun­da­tion of their approach. To make fee-based busi­ness a cen­tral part of your busi­ness, you have to assign this top priority.

The sec­ond is to effec­tively artic­u­late what clients get for the fee they pay. A fee-based approach makes investors’ annual costs absolutely trans­par­ent and requires clients to explic­itly agree to pay that cost — in light of that, com­mu­ni­cat­ing your value is job one.

Here’s a recent arti­cle and video that talk specif­i­cally to this point:

Watch Video Run Time — 3m 31s

Read Arti­cle

And click here for the PriceMetrix report on fee and man­aged asset pricing:

http://​bit​.ly/​m​1​k​gu5

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Tags: Alignment, Anxiety, Approach Work, Assets, Big Picture, Business Models, Commissions, Conflicts, Decade, Desire, Haggle, Industry Software, Insights, Investment Industry, Investors, Leads, Relationships, Report Features, Revenue Model, Software Firm
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Stop Leaving Fee-Based Dollars on the Floor

Wednesday, September 21st, 2011

Stop leav­ing fee-based dol­lars on the floor

by Dan Richards, Cli​entIn​sights​.ca

One of the impor­tant trends among suc­cess­ful advi­sors over the past decade has been the shift from a busi­ness whose rev­enue model depended on com­mis­sions to one based on annual fees.

A recent research report pro­vides impor­tant insights on get­ting the level of fee pric­ing right, one of the keys to mak­ing a fee-based approach work.

The big pic­ture on fee-based business

At the end of Decem­ber, the aver­age advi­sor at US and Cana­dian full-service secu­ri­ties firms had 25% of assets and 37% of rev­enue in fee-based accounts; 80% of advi­sors had at least 5% of assets in fee-based programs.

Over the last four years, the typ­i­cal advisor’s fee-based assets are up 24%, at a time when non fee-based assets were down slightly. The aver­age advi­sor opened just under 15 new fee-based accounts in 2010, up from 12 accounts in 2008 — over 80% of these accounts were with new relationships.

These are some of the find­ings from the most recent Insights whitepa­per by invest­ment indus­try soft­ware firm PriceMetrix. This report fea­tures data from 15,000 advi­sor books at a broad range of Cana­dian and US firms; these advi­sors worked with over 2 mil­lion investors rep­re­sent­ing assets of $850 bil­lion (so an aver­age account size of $400,000.)

Note that the firms PriceMetrix works with tend to be full-service secu­ri­ties firms, so the actual num­bers may dif­fer from advi­sors with other busi­ness mod­els, although the over­all trends should be.

What’s dri­ven the move to fee-based

There are a num­ber of rea­sons for the growth in fee-based accounts.

Start with the fact that a fee-based approach leads to bet­ter align­ment of inter­ests. For investors it can reduce con­cerns about poten­tial con­flicts and whether a rec­om­men­da­tion to buy or sell is moti­vated by the advisor’s desire to gen­er­ate a com­mis­sion. Fur­ther it elim­i­nates client anx­i­ety about not get­ting a fair price if they don’t hag­gle about com­mis­sion levels.

For advi­sors, fee based-business escapes the com­modi­ti­za­tion trap on com­mis­sions and matches rev­enue and effort — good advi­sors pro­vide ongo­ing, reg­u­lar com­mu­ni­ca­tion and advice to clients and a fee-based approach reflects that.

Finally, fee-based busi­ness pro­vides pre­dictable rev­enue. One of the key things that dri­ves long term value in a busi­ness is “recur­ring rev­enue”, the fact that once an ini­tial sale is made, pro­vided that you do a good job, addi­tional rev­enue can be relied on. This is noth­ing new — Gillette built a great busi­ness based on giv­ing away razors and then mak­ing money off razor blades.

For advi­sors look­ing to enhance the long term value of their busi­ness, recur­ring rev­enue is key — that’s why some advi­sors who were his­tor­i­cally trans­ac­tion ori­ented have sat down with clients, shown them how much they’ve paid in com­mis­sions over the past few years and sug­gested a fee below the com­mis­sion level clients paid in the past, fore­go­ing some rev­enue for sta­bil­ity and predictability.

Get­ting fee-based pric­ing right

Per­haps the most crit­i­cal ele­ment to a prof­itable fee based busi­ness is get­ting pric­ing right.

Three obser­va­tions on pric­ing from the PriceMetrix research:

1. Under­pric­ing of small and mid-sized accounts

Aver­age rev­enue from client house­holds with assets of $500K to $1 mil­lion is two to three times that for clients with $100K to $250K.

Even account­ing for higher com­mu­ni­ca­tion and ser­vice lev­els for larger clients, it appears that advi­sors are either under­charg­ing smaller clients or over­charg­ing larger ones.

Here’s the aver­age pric­ing for accounts at dif­fer­ent lev­els of house­hold assets:

House­hold account size Aver­age fee

Take­away One:

Advi­sors need to scale pric­ing so that it’s fair to clients of all sizes and to set min­i­mum lev­els of rev­enue per household.

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Tags: Alignment, Anxiety, Approach Work, Assets, Big Picture, Business Models, Commission Levels, Commissions, Conflicts, Decade, Desire, Haggle, Industry Software, Insights, Investment Industry, Investors, Leads, Relationships, Report Features, Revenue Model, Software Firm
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What is Strategy?

Wednesday, May 18th, 2011

Recently, I met with a very suc­cess­ful invest­ment advi­sor (IA) who told me that his strat­egy for grow­ing his busi­ness was to get refer­rals from sat­is­fied clients and cen­tres of influ­ence. While that is an effec­tive method or tac­tic for grow­ing an advi­sory prac­tice, it is not a strategy.

We define strat­egy as the align­ment of three elements:

1.    The out­puts or objec­tives you want to achieve.

2.    The capa­bil­i­ties and resources you have avail­able to real­ize your objectives.

3.    The oppor­tu­ni­ties and chal­lenges the envi­ron­ment provides.

It is impor­tant to address each of these ele­ments as you develop your strat­egy for your busi­ness. The artic­u­la­tion of your strat­egy is your busi­ness plan. The for­mat we use for busi­ness plan­ning is designed to address each of the three essen­tial ele­ments of strate­gic planning.

Your busi­ness plan con­sists of four inter-related elements.

A. Defin­ing Your Busi­ness - In this part of the busi­ness plan, you describe your Vision, Mis­sion, Val­ues and Busi­ness Oppor­tu­nity. Your busi­ness plan begins with a one or two para­graph descrip­tion of your vision state­ment. It should clearly artic­u­late your pic­ture of the busi­ness and the direc­tion in which you are tak­ing it. The vision state­ment answers the ques­tion, “Where are we going?” The mis­sion state­ment describes your pur­pose and answers the ques­tion, “Why are we here?” Your value state­ment answers the ques­tion, “What is impor­tant to us?” Val­ues are the things or con­di­tions you con­sis­tently want to express. The final ele­ment in defin­ing your busi­ness is the busi­ness oppor­tu­nity. This seg­ment of your busi­ness plan addresses four ques­tions: 1. How do you make your money? 1. How do you spend your time? 3. Who do you sell to? And 4. What do you sell them?

B. Set­ting Objec­tives - An objec­tive is a spe­cific, mea­sur­able result, within a stated time­frame. Typ­i­cally, the objec­tives include rev­enue and prof­itabil­ity. The start­ing point in set­ting objec­tives is to iden­tify your five-year key objec­tives. Then, you work back to iden­tify your one-year objec­tives. The final step is to ana­lyze where you are today. This is known as a SWOT analy­sis (Strengths, Weak­nesses, Oppor­tu­ni­ties and Threats). By defin­ing your busi­ness, set­ting objec­tives and com­plet­ing a SWOT analy­sis, you can now do an issues analy­sis to iden­tify the issues that must be addressed to align objec­tives, sys­tems and capa­bil­i­ties with the oppor­tu­ni­ties and chal­lenges the envi­ron­ment provides.

C. Oper­a­tional Strate­gies - The oper­a­tional strate­gies describe what you are going to do to real­ize your objec­tives with the appro­pri­ate sys­tems and capa­bil­i­ties to take advan­tage of mar­ket oppor­tu­ni­ties and over­come any chal­lenges you fore­see. The first step is to pre­pare your mar­ket­ing plan. The plan details what mar­ket­ing activ­i­ties you will ini­ti­ate to build your brand and cre­ate a unique iden­tity in your cho­sen market(s). The next step is to pre­pare your sales plan. The sales plan out­lines who you will sell to, what you will sell them and when you will sell them. The ser­vice plan describes the ser­vice activ­i­ties you will engage in to get and keep clients. Your ser­vice plan also high­lights your value propo­si­tion. Once you have com­pleted your mar­ket­ing, sales and ser­vice plans, you can deter­mine how to inte­grate these activ­i­ties and assess the resources you will need to ful­fill each aspect of your busi­ness plan. At this point, you are in a posi­tion to pre­pare your resource plan. This plan looks at the sys­tems and capa­bil­i­ties you will need in order to reach your objec­tives. The final step in the strat­egy seg­ment of your busi­ness plan is to iden­tify major tasks and poten­tial road­blocks. In any given time­frame, there will be a small num­ber of tasks that are crit­i­cal to your busi­ness suc­cess. Fail­ure to focus on these major tasks can lead to busi­ness fail­ure. Finally, the iden­ti­fi­ca­tion of poten­tial chal­lenges can help you to antic­i­pate how you will deal with these poten­tial roadblocks.

D. Finan­cial Man­age­ment — The last part of the busi­ness plan deals with the finan­cial aspects of your busi­ness. To be suc­cess­ful as an entre­pre­neur, you must take the time to fully com­pre­hend the busi­ness finan­cials, both his­tor­i­cal and pro forma. The busi­ness plan will include his­tor­i­cal finan­cial infor­ma­tion about the busi­ness, and a pro-forma analy­sis to show the antic­i­pated rev­enue, expenses and profit going forward.

It is impor­tant to remem­ber that your busi­ness plan is a snap­shot of a mov­ing pic­ture. For entre­pre­neurs, it is impor­tant to view busi­ness plan­ning as an iter­a­tive process. Since change is the only con­stant, you need to sched­ule time on an ongo­ing basis to review and update your busi­ness plan. In other words, hav­ing a busi­ness plan is only one aspect of devel­op­ing and imple­ment­ing strat­egy. A recent study of 1,000 top invest­ment advi­sory firms in the US found that the IAs lead­ing the firms invest 2 1/2 to 3 hours a week focused on the strat­egy for grow­ing their prac­tice or busi­ness. Yet, in our work, we find most advi­sors spend very lit­tle time on strat­egy each week or month. It is lit­tle won­der that many advi­sors feel the effect of the envi­ron­ment, rather than mas­ters of their own destiny.

Norm Trainor is the founder of The Covenant Group, a com­pany spe­cial­iz­ing in prac­tice devel­op­ment for advi­sors. For fur­ther infor­ma­tion, visit his Web site at www​.covenant​group​.com.

Fol­low The Covenant Group at:

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Tags: Alignment, Articulation, Business Opportunity, Business Plan, Business Planning, Investment Advisor, Mission Statement, Mission Values, Norm Trainor, Objective, Paragraph Description, Profitability, Referrals, Segment, Strategic Planning, Tactic, Three Elements, Time 3, Timeframe, Vision Mission, Vision Statement
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