The relationship between advisors and clients is changing and it is important that advisors not only understand the current playing field but prepare for the new game ahead. Recent statistics reported by the Wall Street Journal show that advisor fees are dipping below 1%, driven primarily by emerging technology and millennial customers. Both of these factors have a lot in common as they represent a shift to a more level playing field between advisor and customer through easier access to information, which has ultimately driven advisor fees down by absorbing some of the duties normally left to the advisor.
Take for instance emerging technology. Firms are rolling out what has been dubbed “robo-advisor” technology, which allows customers to directly monitor, engage with, and make changes to their product portfolio without ever directly interacting with their human advisor. Person-to-person advisor interactions, under this scenario, become limited to portfolio reviews and more granular financial changes and tasks which require the advisor’s oversite. While efficient and functional, the outcome of “robo-advisor” technology is less time with the advisor and thus a lower fee.
Bear in mind, technology attributes do not lead to lower fees in all cases. For instance, the compressed model, or bionic approach, is a human-assisted version of the technology which uses “robo-advisor” technology as support to the advisor and in the process maintains and enhances the financial advisor relationship with the client. In this scenario, fees are minimally impacted – if at all – and an advisor putting this technology scenario to savvy use is able to add value, provide stellar service, and appeal to a wider market segment such as the millennial customer.
Turning to the millennial customer, this market segment is more technologically and informationally savvy than any generation before it. Not only have they come of age accustomed to receiving instant information via the Internet and social media, they have also become adept at using multiple resources to assimilate any gaps in their knowledge base with a surprising level of ease. This skill set has given the millennial client an edge up in that much of their research, product planning, and portfolio strategy will have been researched and outlined by the client themselves prior to meeting with the advisor. Additionally, the millennial client will have done their due diligence in evaluating potential advisors for their account, making the competition for their business even more stiff than in other customer market sectors. The end result is the reduction of fees in order for the advisor to stay competitive with the millennial customer.
While technology and millennial customers are two factors currently impacting fees, it is assured that over time with the now defunct DOL rules and unclear regulatory path that more issues will present themselves that will impact advisor fees in the negative. Which begs the question, how can an advisor adapt and thrive given both the known and unknown factors impacting their fees? The answer is simple and it comes down to business basics. Look to your competitive differentiators to grow internally.
It will be those firms and advisors which best have the flexibility to meet the client where they are at, provide insight and guidance in an engaging way, and deliver a superior customer experience that will best be able to maintain their fee structure. No other firm structure or advisor paradigm is better positioned to achieve and maintain those goals than the RIA, Hybrid, and Independent. By nature, these firms thrive on transparency and nimble business operations with the veil between executive, advisor, and client pulled away, enabling greater engagement at all levels. This translates to a better fee structure for the advisor achieved through the client’s greater understanding of the advisor role and its direct impact on their personal financial success.
The flip-side of the strength of the RIA, Hybrid, and Independent when it comes to current and future fee structures is the negative position of the large wirehouse firms. These firms have an “ivory tower” image that has fostered disengagement with the customer, the direct impact of which can be seen in the astronomical growth of the RIA sector. Further, the public relations woes of large wirehouses, in particular Wells Fargo, have done nothing to solidify trust with the customer. It can be expected that clients of the large wirehouses have already started – and will continue to have – a ‘what are we paying for’ mentality which will lead to a questioning and deterioration of advisor fees out of competitive necessity.
Another important area that should be focused on, and one which also has a vital impact on fees, is a firm’s business plan, with particular attention to acquisition opportunities. As we continue to see fee and price compression industry-wide, acquiring assets via mergers, roll-ups, succession planning, and other strategic pursuits becomes even more important to healthy revenue stability at any practice. With the aging of the advisor population, as well as continued regulatory pressures, there has never been a better time to make acquisitions.
If you reading the article from the inside of a retail wealth management office, you are probably wondering what I’m talking about because you know the folks in your office and none of them are retiring. If this is the case, you’ve picked up on yet again another disadvantage of not becoming an independent advisor or RIA, where the acquisition opportunities are plentiful. Acquisition opportunities are one of the biggest reasons we see independent advisors and RIA’s growing at such a rapid pace. There’s is simply no better way to deal with fee compression than through one acquisition transaction bringing in an additional 50mm, 100mm, 200mm, or beyond.
As the saying goes, by failing to prepare you are preparing to fail. Understand the whys impacting fee structure, the whos in terms of what type of firm is best poised to weather the shift in fees, and the hows of retaining client loyalty. These are the keys to insure fee stability and best position an advisor for prosperity, whatever the future holds.