Coping with Fee Compression
Not since commissions were deregulated in 1975, and the discount brokerage business was born, have financial advisors come under greater pressure to reduce fees.
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Coping with Fee Compression
Not since commissions were deregulated in 1975, and the discount brokerage business was born, have financial advisors come under greater pressure to reduce fees. While you may not be entirely immune from these competitive pressures, you may profit from asking yourself “Why should I reduce fees?” before going down the path of trying to compete with the pricing of robo-advisors or other low-cost investment management programs.
What’s Your Value?
There is a growing body of research that quantifies the value of a financial advisor. Your value is not insignificant. Perhaps the most well-known study was performed by Vanguard. According to Vanguard’s analysis, a financial advisor can potentially add about 3 percent in net returns, arising from a range of advisor practices, including cost-effective implementation, rebalancing, behavioral coaching (the highest potential for advisor alpha), asset location and spending strategy.1
Your value likely extends beyond those components calculated by Vanguard, such as assistance with insurance and risk management, estate planning and so on. The rise of robo advisors, other low service platforms and implementing fiduciary standard are likely to increase fee compression.
Without a real appreciation of your value, competing on price against robots and low-service platforms is a battle you can’t hope to win (nor should want to win).
Strategies for Coping with Fee Compression
To cope with the downward pressures on fees, you might look at strategies for operating profitably in this changing landscape.
• Build Scale. Efficiencies that allow for profits in a shrinking fee environment may mean growing your business through:
o A combination of organic growth, teaming up with a partner that can bring benefits to your product and service offering, or merging with another firm
o Improving internal capabilities through enhanced technology, outsourcing or staff hiring; this may free up your time to devote to generating new business
• Specialize. Low-fee investment platforms are not particularly skilled at much more than building a portfolio. Specializing in retirement, college financing strategies or alternative investments may create a meaningful distinction for your practice.
• Certifications. The old adage of “you get what you pay for,” is as true in financial services as it is in any other industry. With over 250,000 advisors in the US, having certifications like CFP, CMA, CFA, etc. gives advisors credibility and a professional edge that can insulate their business from fee compression.
• Make Yourself Visible. Financial advice is still about human connection. Increase your exposure to clients, prospects and the general community through a newsletter, a blog and public speaking.
Whether pundits predicted in 1975 the demise of full-service brokers is hard to know, but it is clear they found a way to adapt to changing circumstances. Likewise, solutions to today’s challenges are not out of reach of smart, adaptable advisors who see these changes as opportunities rather than obstacles.
1 “Putting a value on your value: Quantifying a Vanguard Advisor’s Alpha,” Francis M. Kinniry Jr., CFA, Colleen M. Jaconetti, CPA, CFP ®, Michael A. DiJoseph, CFA, and Yan Zilbering, March 2014
See referenced disclosure (2) at http://blog.americanportfolios.com/disclosures/