Study Finds Lack of Focus on Pricing May Prove Costly for Advisors, with Revenue Yield and Organic Growth Dropping after Years of Stability

The 2016 Fidelity RIA Benchmarking Study Identifies Three Steps to Help Advisors Consider Their Approach to Pricing to Keep Up with Evolving Advice Landscape:

-- Overcome Pricing Inertia

-- Focus on Transparency

--Align Pricing with Value

BOSTON--(BUSINESS WIRE)--Fidelity Clearing & Custody Solutions, the division of Fidelity Investments that provides clearing and custody to registered investment advisors (RIAs), retirement recordkeepers, broker-dealer firms, banks and insurance companies, today released new research on pricing and fees from its 2016 Fidelity RIA Benchmarking Study¹ which reveals that firm pricing models are not keeping up with the evolving advice landscape, with only 9 percent of RIAs reporting that changing their pricing structure is a strategic focus for their firm.

According to the study, this lack of focus on pricing may prove costly. After years of stability, median revenue yield is down four basis points (to 69 bps), and organic growth has dropped to 6.7 percent, the lowest level in the last five years. Meanwhile, forces like an aging client base are requiring firms to re-evaluate their business strategies, including their approach to pricing, to remain competitive. Seventy-three percent of high-earning millennial investors would be more likely to work with a financial advisor if their fees were lower.²

The study helps dispel common myths about pricing and fees and identified ways in which wealth management firms can consider changing their approach to pricing to keep up with today’s advice landscape:

1. Overcome Pricing Inertia: Most firms feel that their pricing model does not need to change, but this inertia could impact firms’ ability to thrive.
2. Focus on Transparency: With almost limitless variations in offerings and fee models, RIAs are making it difficult for investors to understand their fees.
3. Align Pricing with Value: RIAs’ bundled, un-segmented pricing is limiting their ability to align pricing and value in a consistent way.

“Many firms do not appear to be changing their approach to pricing, potentially hindering their ability to grow in the years to come,” said David Canter, executive vice president, practice management and consulting, Fidelity Clearing & Custody Solutions. “We’re seeing a collision of changing investor preferences, technologies and regulations in the wealth management industry that will require advisors to consider fresh pricing formulas to remain competitive. By adopting technology and deploying the science of segmentation, advisors may be able to adjust their pricing while also increasing their ability to serve a broader group of clients.”

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. Most advisors have not changed their pricing models in the last five years, and 70 percent of firms do not feel that industry macro trends like the aging client base, digital advice or regulatory change will drive pricing changes. However:

1. As Baby-Boomers move through retirement, significant wealth will transfer to younger generations who are more price-sensitive and are more likely to prefer alternative pricing structures. The study found that only 15 percent of RIAs’ assets under management (AUM) are held with 30–49 year old clients, and only 33 percent of their AUM is held with multi-generational clients.
2. Investment management is at risk of becoming commoditized, in part driven by the rapid rise of digital advice models, which often charge lower fees. Despite this, the study found that traditional RIAs are still slow to embrace digital 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.

Firms that are looking to remain competitive will respond to coming changes in the market environment in various ways, and should consider regularly re-evaluating their pricing models based on industry trends, benchmarking data, their value propositions, clients and service offering.

MYTH 2: "Our Pricing Model is Easy to Understand"
The study found that 71 percent of RIAs think clients easily understand their pricing; however, the study uncovered that there is an almost limitless variation in the combinations of offerings and fee models across firms, making it difficult for investors to understand the fees from their advisor.

1. The combination of services offered and the depth of services varies widely. When considering services offered and depth of capabilities, the study found that 81 percent of offerings were unique (i.e., different from every other firm), and the two most common combinations were only shared by 3 percent of firms.
2. There are a wide variety of fee models utilized. 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.
3. Advisors are overestimating the degree to which investors understand their fees. Fifty-one percent of investors think they pay no fees or are unsure of the fees that they pay³.

MYTH 3: "Our Pricing Model Reflects the Value that We Provide"
According to the study, half of firms (51 percent) agree their pricing approach is primarily driven by a deep understanding of the value delivered and is less driven by cost to serve (25 percent) or competitors’ pricing (14 percent). Meanwhile, the study uncovered that RIAs’ bundled, un-segmented 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:

1. 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 percent) 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, 82 percent of RIAs who offer financial planning include it in their basis points fee; however, they estimate that only 50 percent of clients actually receive it.
2. The majority of firms have not created client segments, which means they may not have an established process to vary their offerings or pricing for different clients. The study found that only 31 percent 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 percent vary their pricing.
3. Next gen clients may not be accessible without utilizing alternative pricing structures. Fifty-six percent of high-earning millennials are interested in getting advice, however pricing and fees are a perceived barrier, as 73 percent of them would be more likely to work with an advisor if fees were lower⁴.

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.

To access the findings for The 2016 Fidelity RIA Benchmarking Study, visit go.fidelity.com/benchmarking. There, advisors can find considerations for their approach to pricing and fees, as well as perspectives from two firms who have enhanced their approaches to pricing to help serve their clients and benefit their businesses.

About Fidelity Investments
Fidelity’s mission is to inspire better futures and deliver better outcomes for the customers and businesses we serve. With assets under administration of $5.5 trillion, including managed assets of $2.1 trillion as of October 31, 2016, we focus on meeting the unique needs of a diverse set of customers: helping more than 25 million people invest their own life savings, nearly 20,000 businesses manage employee benefit programs, as well as providing nearly 10,000 advisory firms with investment and technology solutions to invest their own clients’ money. Privately held for 70 years, Fidelity employs 45,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit https://www.fidelity.com/about.

All statistics in this news release are from The 2016 Fidelity RIA Benchmarking Study unless otherwise indicated herein.
The content provided herein is general in nature and is for informational purposes only. This information is not individualized and is not intended to serve as the primary or sole basis for your decisions as there may be other factors you should consider.
The registered trademarks and service marks appearing herein are the property of FMR LLC.
Fidelity Clearing & Custody Solutions provides clearing, custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC. Members NYSE, SIPC.
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¹ The 2016 Fidelity RIA Benchmarking Study focused on pricing and fees. Respondents were primarily RIAs that custody some portion of their assets with Fidelity Investments (“Fidelity”). The online survey was conducted from April 27 through June 16, 2016, and was administered by an independent third-party research firm not affiliated with Fidelity. Fidelity was identified as the study sponsor. 402 RIA firms participated in the study. This may not be representative of the experiences of all firms and is not indicative of future success.
² The 2016 Fidelity Investor Insights Study was an online, blind study conducted during the period January 5 through January 22, 2016. It involved a total of 1,287 20-minute (on average) online interviews, with the sample being provided by TNS, a third-party research firm not affiliated with Fidelity. The study was focused on understanding affluent investors’ attitudes, goals, behaviors and preferences related to investing, wealth management, and advice, with a focus on investor perceptions of their primary advisor relationships. Target sample included respondents across affluence levels, from $50,000 to more than $10 million in total investable assets.
³ Phoenix Global Wealth Monitor, Phoenix Marketing International, 2015
⁴ The 2016 Fidelity Investor Insights Study was an online, blind study conducted during the period January 5 through January 22, 2016. It involved a total of 1,287 20-minute (on average) online interviews, with the sample being provided by TNS, a third-party research firm not affiliated with Fidelity. The study was focused on understanding affluent investors’ attitudes, goals, behaviors and preferences related to investing, wealth management, and advice, with a focus on investor perceptions of their primary advisor relationships. Target sample included respondents across affluence levels, from $50,000 to more than $10 million in total investable assets.