A new report claims that RIA firm pricing models are not keeping up with the evolving advice landscape, with only 9% of RIAs reporting that changing their pricing structure is a strategic focus for their firm.
According to the 2016 Fidelity RIA Benchmarking Study, after years of stability, median revenue yield is down four basis points (to 69 bps), and organic growth has dropped to 6.7%, the lowest level in the last five years. Meanwhile, the report’s authors say that forces like an aging client base are requiring firms to reevaluate their business strategies, including their approach to pricing, to remain competitive.
The report highlights three myths about RIA pricing and fees:
Myth 1: “Our Pricing Model Does Not Need to Change”
According to the study, nearly half of RIAs believe their pricing model is effective and does not need to change. However, most advisors have not changed their pricing models in the last five years, and 70% of firms do not feel that industry macro trends like the aging client base, digital advice or regulatory change will drive pricing changes. However the study found that only 15% of RIAs’ assets under management (AUM) are held with 30-49-year-old clients, and only 33% of their AUM is held with multigenerational clients. The study found that traditional RIAs are still slow to embrace digital advice models, with half of firms reporting they do not have any digital strategy and do not intend to develop one; less than a third plan to develop one.
Myth 2: “Our Pricing Model is Easy to Understand”
The study found that 71% of RIAs think clients easily understand their pricing; however, the study uncovered what the authors termed “an almost limitless variation” in the combinations of offerings and fee models across firms. The authors noted that the combination of services offered and the depth of services varies widely, and that when considering services offered and depth of capabilities, the study found that 81% of offerings were unique (i.e., different from every other firm), and the two most common combinations were only shared by 3% of firms. Over half of all fee models were unique, based on pricing tiers and the levels at which firms can set breakpoints. The percentage of unique fee models rose when also considering differences in fees in each tier, according to the report, which concluded that advisors are overestimating the degree to which investors understand their fees. In fact, just over half (51%) of investors think they pay no fees or are unsure of the fees that they pay.
Myth 3: “Our Pricing Model Reflects the Value that We Provide”
According to the study, half of firms (51%) agree their pricing approach is primarily driven by a deep understanding of the value delivered and is less driven by cost to serve (25%) or competitors’ pricing (14%). Meanwhile, the study uncovered that RIAs' bundled, unsegmented pricing may be limiting their ability to align pricing and value in a consistent way, especially when it comes to reaching the next generation of clients.
The report notes that firms are bundling fees for their services into their overall basis point fee, limiting their ability to tailor offerings and pricing. The study found that nearly all (98%) of firms use some form of basis points on an AUM fee, and nearly half of firms bundle fees for all services offered into their overall basis points fee. However, not all services are delivered to all clients. For example, the report notes that 82% of RIAs who offer financial planning include it in their basis points fee; however, they estimate that only 50% of clients actually receive it.
Moreover, the study found that only 31% of firms have multiple segments of clients for whom they tailor offerings or pricing. Of those who do, only two-thirds vary their offerings or service models, and only 48% vary their pricing. The report cautions that next gen clients may not be accessible without utilizing alternative pricing structures; 56% of high-earning Millennials are interested in getting advice, however pricing and fees are a perceived barrier, as 73% say they would be more likely to work with an advisor if fees were lower.
The authors say that firms should consider better aligning their pricing models with the value they provide by evaluating alternative pricing structures and potentially, unbundling the pricing of their offerings. Firms may also consider setting minimum fee levels to help ensure profitability and attract younger investors who are poised to inherit and accumulate significant wealth.
