Fees: Compression Conversations and Value

compression

Last month it seemed that many of my conversations were about fees.  I participated in an industry meeting where we had a point/counter-point style debate on the future of advisor revenue.  In addition to the debate, a couple of weeks ago I participated in a podcast with Ben Jones of BMO Global.  The podcast – What am I paying you for: The evolving pricing models of advice – was an interesting conversation about the evolving discussion around fees for financial advisors.

In both conversations, I took the position that fees are at a crossroads and that we need to understand the pressures of regulations, robo and virtual advisors, generation X & Y investors and clients seeking validation and transparency.  In the point/counter-point session, the other speaker took the position that, through his research, advisory fees had not gone down much over the last few years. He suggests the talk about fee compression is alarmist and not realistic in today’s environment.  So which is it?  Is fee compression real?

Maybe, Not Yet

Many of you are probably not seeing advisory fee compression yet.  In fact, most of the advisors in our 2016 paper “Fees at a Crossroads” said that they did not intend to change their fee structures in the next few years.  However, one of the points that I made in the debate is that fee compression is real and that we are to blame as we are training our clients to think that way.

In the discussion, the moderator asked what he thought was a simple question, “Is fee compression real?”  My colleague suggested that his research says no, fees are not going down.  However, I suggested he is looking at advisory fees.  You only have to look at the ramifications of the fiduciary movement, the active/passive debate and the “race to zero” with low cost ETF funds to see that fee compression is real on the product side of the business today even if it is not felt (as much) on the advisor side.

More importantly, we are complicit in the fee compression conversation, as many advisors are promoting the lowest cost portfolios instead of planning and advice as a differentiator of their businesses.  Personally, I have no issues with the low-priced portfolios or higher-priced as long as they do the job and are in the best interest of the client. This isn’t an implementation discussion.  But let’s be honest, after the consumer has been trained to look at fees of product over and over again, will it be a leap for them to start looking at fees for advice?  And what is going to be your answer?

Do Not Pull out the Research Report

A few papers outline the value of an advisor to his/her clients’ investment portfolio.  Of course, the papers show the advisor adds significant value in their ability to communicate, plan, keep the client invested in tough times and manage for after tax returns.  The papers extoll the value of working with an advisor.  As a co-author of many papers, I am often asked if I’m planning to write something similar or add our take on the conversation.  Each time I decline for two reasons:

  1. These are great reports and what could we add or say different?
  2. If the advisor is pulling this out to show their clients how much value they add, they have already lost the client.

Show Value Every Day

To me getting a question about fees is really about showing value (or lack thereof).  If you are not showing value, your fees are going to be questioned.  I like the analogy of a large assembly line.

Think about a factory with their products coming off an assembly line.  Just as the final touches on the product are completed, there is a person at the end of the line checking it out. That person is the quality control engineer.  His/her job is to make sure whatever comes off that line is perfect.  If they find an error it is most likely not with the finishing touches but somewhere back on the line – someone forgot to do something right.  If you get a question about fees, you missed something down the line; you didn’t show your value.

Value Steps

What should your assembly line look like?  Here are some ideas that firms are implementing around value and fees:

  • Start with a segmentation, but not traditional segmentation:  I’ve written time and time again that segmentation should start with what is important to the client, not the advisor.  Know your niches or ideal clients and build personas to reflect their interests, concerns and needs.  Focus your practice on meeting the needs of those personas and you will create the sense of exclusivity or premium value.
  • Build your value proposition:  Communicate your value (often) to who you work with, what their obstacles are and how you address those concerns.  Our industry tries to focus on how we are paid versus what we actually do. Do not fall into the trap of fee only, fee based etc.  What do you do (and for who) to earn your fee? Build an advice-based business.
  • Show them what you do and why: Use a roadmap for client service to show your ongoing commitment to providing advice.  What happens that the client sees, what you do that they don’t. Give examples and stories of successes in the advice business.
  • Go back to the beginning:  Each meeting with a client is an opportunity to communicate your progress and value. Start the conversations with a timeline of what concerns they had when they started with you, the projects you have worked on and the progress.
  • What you do, not always what you say:  Remember, actions speak louder than words.  You can say planner or advice but if your communications, conversations  and meeting agendas are focused on investment returns and providing the lowest cost implementation (as a differentiator) then you are training your clients to look at the cost and expense instead of the plan.

It’s Okay to Talk About Fees

In a debate or in a podcast, fees are a part of the conversation.  Maybe you are not feeling the pressure today.  I ended the conversations with a point that while fees have not changed much in the last 3 years, I wonder what it will look like in 5 years. The market is up, volatility is largely down and most consumers are relatively happy.  With the outside pressures and market pressures – do you think we will still have this tailwind 5 years from now?  Why not be on your toes proving value today instead on being on your heels when you are asked to justify fees tomorrow?

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John Anderson

John Anderson

John Anderson is the creator and lead author of Practically Speaking blog and Managing Director of Practice Management Solutions for the SEI Advisor Network.

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