As fees fall, do advisors need to take cover?
What does commission-free trading have to do with advisor fees?
Turns out a lot.
Equity research analysts had a funny question for Morgan Stanley CEO James Gorman on his firm’s third-quarter earnings call. Profits were looking good at the wirehouse, especially in wealth management. Was Morgan Stanley going to cut advisory fees to match the fee slashing of Charles Schwab, Fidelity and others?
In the not-so-distant past, that dangerous thought was not on anyone’s mind. Gorman reminded analysts that his firm’s advisors were providing sophisticated investors with complex financial services and advice, and that Morgan Stanley was not a non-profit. UBS, meanwhile, surprised some with its decision to eliminate fees on some of its in-house SMAs.
Though the details as to how UBS will make money remain murky, the firm announced that it will open its no-fee platform next year to outside SMA managers.
How the times have changed. Wealth management clients now live in an internet-based world in which they are empowered to pay for just the services that they want. Zipcar for example, allows consumers to get the precise car that they need, for exactly how long they need it. Freemium models like Spotify abound in which customers can opt to get broad menu of music for free or pay for an enhanced offering.
Some of the best things in life today are essentially free: Google Maps, Waze, texting, social media and now stock trading. The amount of worthwhile stuff that consumers can access is truly mind boggling.
There is no business that is immune to a complete do-over on pricing. Consumers have tasted the power of transparency and are demanding greater control over what they pay for, when they pay for it and how much they are paying.
Retail businesses have suffered in this new environment. Thousands of stores have shuttered as online challengers eat their margins. And the threats keep multiplying. Now, secondhand websites and a consumer desire to recycle and eliminate waste are cutting into demand for new products.
The upshot of all this for financial advisors is twofold. Clients may recognize the value of holistic wealth management — but balk at paying for it.
Consumers expect a lot and resist a “one size fits all” type of fee schedule. They want all charges to be fully transparent and customized to their needs. Advisory fees therefore have to be viewed as fair by customers. Who can forget 2008 when many clients were paying 1% management fees for underwater SMA accounts?
In recent months, I've had an increasing number of conversations with wirehouse advisors who want the flexibility to discount fees for clients. They want to charge in accordance with each client’s needs. Some accounts require only minimal service. In other cases, advisors want the flexibility to respond to competitive pressures.
Secondly, against the backdrop of a consumer environment that is saturated with free stuff, advisors need to become experts at communicating their value to clients. This isn’t just an important skill. It’s essential to their long-term survival.