Advisors: Don’t Cheer the Race to Zero – You’re Next

Race

Lots of news last week as a few firms announced zero cost ETFs and lowering of transaction fees across the board. While the industry has been talking about this race to zero fees for a while, it looks as if we just may be there. What concerns me however, is not the lower fees on investment products but what’s next – when product fees can’t go any lower and clients are getting more savvy about pricing and value – clients are going to come after their advisor. My bet is that many advisors are not ready for that discussion.

Fee transparency and the savvy client.

Just three years ago, we rolled out a paper called Fees at a Crossroads. The 2015 version of that paper surveyed consumers about attitudes toward advisory fees and the services they used. One of my favorite statistics to share, was 38 percent of clients did not know how their advisor was compensated (or didn’t think they paid their advisor). At the time, I suggested that clients were just starting to be bombarded by the media, advisor competition and the government (with their discussion of the fiduciary rule) about fees. I was concerned that advisors may have been in for a difficult discussion when clients “woke up” and tried to understand the value/pricing models that were in place.

In our new paper, Fees at a Crossroads: Revisited, it seems that my concerns were well founded. Our 2018 survey showed that the number of clients that don’t know or don’t think they pay their advisor dropped to 28 percent. That’s a 26 percent decrease in just three short years. While 28% is still too big of a number, the percentage increase of aware clients is dramatic. I would like to give credit to more transparent advisors, or to the media for the groundswell of articles on the fiduciary rule. But my best guess is that more of the pressure is coming from the competition – and some of the competition is the direct to consumer custodians who sometimes double as a product manufacturer.

A commodity

When I started in the business (yes, over 30 years ago), most of the ads for financial products were about performance. You would routinely see an ad for a fund company or specific investment vehicle that touted performance. Many carried, with pride, a Morningstar ranking to show just how special it was. For years, the fund companies trained their clients to focus on rankings and performance not how it fit into an overall allocation, nor how it benefited from a particular style of investing being in favor at the time. Fund supermarkets sprung up at the custodians making it easier to buy/sell whatever was a 5 star at the time.  It was all about performance then, today it is all about cost.

When you look at many of the ads for financial products today, low cost seems to dominate.  Seems to me that the product sponsors are basically saying that consumers really don’t need to pay for investing anymore. Just pick some “free” ETFs on our platform and you will be successful. Today’s low cost product is yesterday’s Morningstar rating. The consumer doesn’t know what it means or how to use it but the ads say it is important so it must be. They are training the client to look at cost only. When cost is the only differentiator, you have the definition of a commodity.

Advisors: Don’t cheer the race to zero – you’re next Click To Tweet

War’s over man. Wormer dropped the big one.

The battle of being an investment-focused advisor is officially over (and the investment-focused advisor lost). Millions of advertising dollars are being spent to say that investing is a commodity and consumers don’t need an advisor who will charge fees. Virtual and robo advisor platforms are providing investment focused advice for 30 basis points or less and the implementation charge is now zero or getting there quickly. We can argue the quality of the advice, the personal relationships, behavior coaching and the sophisticated planning you provide for the wealthier clients but you can’t argue the cost.  To me, it is time to more closely align price and value.

In our updated survey, we found that 53 percent of investors feel financial planning is as important as investment management services, and more than 30 percent think planning is more important. We know planning is important yet many of us charge AUM only but I would argue that the client may not be able to separate out the planning from the investment fees or understand price to value correlation. I would suggest that now is the time to begin that education especially if 83 percent of your clients value that planning.

… and it’s not over now.

Many firms that are aligning price and value begin with focus. They segment, create personas and change their service model to fit the client. Those firms are looking at aligning their systems to meet or exceed the needs of that ideal client. They are adding planning (segmented, modular or holistic) to their toolbox and pricing is flexible and client centric.

The inevitable fee discussion will likely come soon with all of your clients – the competition is forcing it.  The question is will you bring it up or will your client?  Will you be on your heels defending your value or will you be proactive and proving your value? The more you are aligned with the perceived value by the client, the more proactive you will be.

SEI Surveys, Advisor Fees, March 2018, n=736 and August 2015, n=775

SEI Consumer research, in partnership with Phoenix Marketing International, January 2018, n=926 and August 2015, n=539.

Phoenix Marketing International is not affiliated with SEI or its subsidiaries.

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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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