If there’s a recurring them in the trade press for advisors it’s stories about fee compression. This thoughtful blog post by respected author and financial advisor Rick Ferri sets forth the case for lowering your fees.
Ferri believes the era of charging a “sweet” 1 percent or more” for managing investments “may be coming to an end.” He notes the availability of far lower fees from Betterment, Vanguard and Schwab. Schwab’s Intelligent Portfolios offering is particularly troublesome for traditional advisors. It offers portfolio management and unlimited financial planning for $660 for the first year and $360 per year thereafter, with no limitations on the size of the portfolio.
Ferri supports the case for lower fees by noting fee compression in other areas of financial service, like the cost of commissions, fund expense ratios and custodial charges.
I don’t trivialize the changes taking place in the financial services industry that will continue to put pressure on your fees. But I also don’t think it’s an imminent threat to your bottom line.
Clients of robo-advisors are fundamentally a different market than those you serve. The availability of these lower priced alternatives primarily serves younger clients, with lower assets, who are often below your minimums.
Different market. Different price structure.
Less price sensitivity
Would you change your dentist, accountant or primary care physician if you could find one who charged less?
I wouldn’t. I trust those providers. I know they will be there when I need them. I can’t imagine comparison shopping. The difference in cost wouldn’t be enough to cause me to abandon people I like and trust.
Not everyone feels the way I do, but it might not be so bad if your clients who were price sensitive found lower cost providers. You’ll never win a “race to the bottom.”
Instead of focusing on the looming threat of fee compression, give your clients service that exceeds their expectations. There’s value to having a trusted advisor who has navigated difficult terrain, and will be there for generations to follow.
I doubt clients who are served in this manner are out looking for lower cost advisors.
Resource of the week:
I recommend Rick Ferri’s blog post. He makes some very legitimate arguments for reevaluating an AUM based fee.