Fee-based Business Up, Pricing Down
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PriceMetrix Chief Executive Doug Trott has a message for fee-based advisors: think about charging more. The Toronto-based practice management and software business says it’s seeing growth among its fee-based clients but that pricing is under pressure.
PriceMetrix released a report based on retail brokerage data it compiled on the 15,000 books of business on its platform that shows fee advisors averaged 76 accounts last year, an increase of 43 percent from 2008. And fee-based assets as a share of total assets increased from 19 percent to 24 percent in that time. But the accounts whose fees were priced above 1 percent dropped by 15 percent in the period, and fee return on assets fell from 1.41 percent to 1.32 percent.
“They give away far too much, frankly,” Trott says. The range of pricing for similar accounts in similar relationships runs from 80 basis points to more than 200. Advisors he talks with tell him they charge 80 basis points but hope to make up more elsewhere in their service offering. Trott calls it “guilt pricing,” driven by the convulsions in the financial crisis that hurt investors’ portfolios; the hope that an advisor can make it up some other way is mistaken, he says. Clients leave reps just as often when fees are raised as when they are lowered, Trott asserts. “They don’t stay or leave for price. It’s not why they’re with you. Your value propositions is why they’re with you. Make sure you price that fully.”
PriceMetrix showed that transactional business has also grown marginally—equity trades per advisor were up 2 percent, to 457, from 2008 to 2010—while commissions as a percentage of principal rose from 1.02 percent to 1.15 percent; average equity ticket was up 3 percent, to $231. “Contrary to popular belief, trading investors did not flee the market ‘en masse’ after the financial crisis,” the PriceMetrix report states. “Annual trades per household declined by only 3 percent in 2009, and remained unchanged in 2010, with buys surpassing sells through the entire period.” Or as Trott puts it, “I’ve been invited to the funeral for transactional business, and it just doesn’t seem to be happening.”
Advisors in the firm’s report appear to be focusing increasingly on more lucrative households. Overall household per advisor were down 4 percent in the two-year period, to 193, but average household revenue grew to $2,944 last year, a 20 percent increase. “We know that efforts been going on for years, but the results are starting to come through,” says Pat Kennedy, PriceMetrix vice president of research and development.
In comparison, advisors who kept or increased their share of small households (defined as having less than $50,000 in assets) saw just a 4 percent increase in average household revenue.
Industry analyst Tim Welsh of Nexus Strategy of Larkspur, Calif. says one driver for the growth in fee-based business is the movement by wirehouses and other large brokerages to push out smaller accounts, partly by paying advisors less for those accounts. That business in heading into the fee-based market. “The small guy is the one who’s paralyzed and stopped trading, has moved out of the wirehouse model,” he says. The business that remains on the brokerages’ books looks more profitable as a result. But there are still pricing pressures on the business, at least on the transactional side. Charging more for transactional business is tough when web trading companies have cut their fees to $7 a trade.
Kennedy says there’s still confusion among advisors over how to price their services, confusion that’s fueled by a lack of awareness of what’s happening in the market. “I remember talking to a rep in 1999, he did about 20 percent of his business below [at fees that were lower than Fidelity’s rates],” he says. “He didn’t know, so we just showed him. He said, ‘Who in their right mind’—and there was an expletive in there—‘would charge less than a discount brokerage if they only knew?’ It’s such a telling comment.”
