A few weeks back, I was fortunate enough to sit on a panel at an industry event discussing fees. The title of the session was “Is Flat Fee Pricing a Viable Option?” and the almost standing room only audience consisted of mainly broker-dealer home office professionals, plus a few advisors. What I quickly learned is that most are struggling to define how flat fees could fit into their offerings and by the questions, a few have decided against it. My point to the audience was simple: If you are going to be in business 10 or 15 years from now, you had better have alternative pricing for your clients. (As an aside, I was interviewed by Investment News on the same subject after the session.)
In our 2018 whitepaper, Fees at a Crossroads Revisited, Raef Lee and I (with the help of Bob Veres) looked at the evolving fee landscape, using our 2015 Fees at a Crossroads paper as a benchmark. It was clear to us that a few things were happening:
- Although the DOL rule was dead, the worldwide fiduciary movement was gaining support
- The link between value and pricing was becoming more important as consumers become more fee savvy
- New pricing variations – while not the mainstream – were being tested based on client needs, account complexity, career stage and portfolio size
Our paper noted the increasing shift from an advisor-driven business model (where the advisor chooses the products, services and pricing) to a more consumer-centric one, especially as it relates to fees. The consumer is driving the change, as alternatives to the traditional model have grown and more choices are being offered.
The fee disconnect
During the panel, I heard the typical pushback of converting from commission to fees; loss of built-in growth in revenue from the AUM model, and transparency (and operational issues) of having a client pay a flat fee were all discussed (and rightly so!). However, I think the one thing missing in most fee discussions goes back to what the consumer wants and what they value.
According to our survey of over 900 consumers and a similar Simon Kutcher survey, 83% of investors believe that financial planning is as important as or more important than investment management. So if financial planning is that important, why are we charging based on how much money they invest with us? Why are revenues tied to the markets or economy, no matter how good a job we do in planning? Why shouldn’t we separate advice and investment fees?
There certainly is no clear solution, and we are not going to solve for it today. But my advice is to start doing your homework now to look at your options. And I’ll say it again: Advisors who plan to be in business 10-15 years from now should be actively looking at different pricing models for the future.
Check with your BD (or your firm and/or firm’s home office) and your partners and custodians to see what they are doing about alternative fee schedules.
I think we are on the cusp of a growing movement around fees. Are you ready for the change?
Neither SEI nor its subsidiaries are affiliated with Bob Veres, Simon Kutcher, or Phoenix Marketing International.
The SEI consumer research survey was conducted in partnership with Phoenix Marketing International, January 2018, n=926.