Fees for managing client investment assets continue to drop. The average fee for new investment accounts continues to decline when measured as a percentage of assets under management, according to a survey by Price Metrix. In 2011 the average fee for new accounts was 1.21% and declined to 1.02% by 2013. In looking at all fee-based investment accounts the average fee in 2011 was 1.14% and fell to 0.99% by 2013, the survey found.
A wider view of this study reveals that this was in part due to an increase in the size of the average account which grew to $293,000 in 2013 from $240,000 in 2011. Larger client accounts will often generate a lower percent of asset under management fee due to breakpoints in the fee structure charged by many financial advisors.
Some of this decline can also be attributed to a trend in the financial advisory world of compressed fees for investment management. What can financial advisors do to maintain revenue and profitability in this environment? (For more, see: Trends Challenging Financial Advisors).
Grow the Firm
This doesn’t mean just adding more advisors and other staff. It does mean growing in a way that leverages your firm’s best attributes in a cost effective way. What follows are some ways to achieve this. (For more, see: How to Be a Top Financial Advisor).
• Form strategic alliances. Advisors can’t be all things to all clients. Team up with other professionals to offer services that your clients need but are outside of your area of expertise. This might include tax advice, estate planning, insurance services and other areas. These can be formalized relationships or a one off alliance. The important thing is that they are beneficial for your clients and all parties concerned.
• Merge with another firm. Small or solo financial advisors might be able to build the infrastructure needed to grow by merging with another firm. This might be a firm of a similar size or it might involve joining a larger firm that can provide the resources you as a smaller advisor cannot afford. Either way if done right this can be a win for both parties.
• Invest in technology. Financial advisors can provide increased services more efficiently via technology. This can range from secure client only portals on your firm’s web site to offering mobile apps. Software for investment management and research as well as for financial planning has been the norm for many years. The use of technology in these areas and in client communications can allow advisors to work more efficiently and more profitably. (For more, see: How Financial Advisors Can Adjust to Robo-advisors).
• Use discretionary accounts. These types of arrangements allow financial advisors the freedom to trade and rebalance client accounts within the parameters of an investment policy statement without having to obtain the client’s permission each time. As a client be sure that you understand how your money will be invested by the advisor. From the advisor’s perspective this can lead to operating efficiencies. (For more, see: Explaining Portfolio Rebalancing to Clients).
Focus and Specialize
Here in the Greater Chicago area where I live and work I know of several financial advisors who have become experts in the benefits offered by a number of the large corporations headquartered in the area. This includes the company’s 401(k) plan and other retirement benefits, their stock and stock option policies as well as other employee benefits. This allows these advisors to hit the ground running when a new client from the company comes on board. It can also help build referrals from existing clients with that company cutting down on marketing costs.
Building a niche such as doctors or teachers, for example, allows you to focus and build your knowledge base with each new client which can lead to a more efficient and profitable practice. (For more, see: Tips for Advisors Who Want to Grow Their Practice).
Add Value and Charge for It
While some people are saying that financial and investment advice are becoming a commodity many clients need and value advice tailored for their situation. If you are providing advice on a variety of financial planning topics that go well over and beyond simply investing the client’s assets you should charge for this advice. While online financial advisors might be fine for some, clients looking for advice on estate planning, stock options, Social Security and retirement planning and other complex issues need competent advisors versed in these areas.
If you are working with clients with larger investment accounts these value-added services might be a natural outgrowth of the relationship already in place if you can demonstrate that you have the expertise they need. (For more, see: Schwab's New Robo-advisor).
Blogging and Social Media
Your current and prospective clients are likely online and you should be too. Many financial advisors have started blogs and have found success in generating client interest. Are the people that you want to have notice you on Twitter or LinkedIn? If so, why aren’t you? It’s about providing information and value to these people and building an online presence so you show up in searches when they are looking for a financial advisor online. (For more, see: How Financial Advisors Are Leveraging Social Media).
The Bottom Line
Fee compression in the investment advisory world is real as it should be in some cases. Savvy financial advisors and their firms will follow a number of paths to grow and stay profitable in this environment. The use of technology and adding value to clients should be at the forefront of these efforts. (For related reading, see: Financial Advisors Need to Seek Out This Group NOW).