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.
784460.1.0
© 2016
FMR LLC. All rights reserved.
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.
