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The Importance of Aligning Price to Value in Wealth Management

The Importance of Aligning Price to Value in Wealth Management

Client perception on the value received for working alongside any advisor or wealth manager is under a microscope. As a result, leading wealth management firms are shifting operating and pricing models to invest for growth and support a wider range of client needs and preferences.

There is no doubt that many investors are feeling financial anxiety and stress these days. The recent banking crisis has left many of us feeling vulnerable and uncomfortable about the security of our cash and investments. Inflation data shows some signs of easing, yet continues to be enough of a persistent tug on the Federal Reserve’s sleeve to keep recession fears hovering. Layer in tight labor markets and consistent market turbulence and investors are understandably worried about their ability to manage for unexpected expenses or plan adequately for retirement.

Considering these trends, Wealth Managers looking to calm and reassure investors must remain steadfast on improving the client experience. Many wealth management firms remain somewhat unscathed by economic uncertainty – benefitting from a decade of organic growth through favorable market conditions – but are now realizing stagnating growth patterns and seeking new ways to attract clients.

Firms are fully aware that the clients they desire are not only worried about the longevity and safety of their portfolios but also yearning for financial planning, coaching and reassurance at cost effective rates. Taking heed, leaders considering operating model shifts are revisiting a few critical questions:

  1. What challenges do our clients expect us to solve?
  2. How are we best positioned to help them be successful?
  3. What are clients comfortably willing to pay for our products and services?  

Price Elasticity of Demand

Firms of all sizes are typically more confident about their ability to answer questions one and two. Question three can be tricky, but willingness to pay for specific products or levels of service is arguably one of the most critical – yet overlooked – components of a comprehensive value proposition. While there has been downward fee compression within the industry at large, many wealth firms argue that investors rarely push back on price. However, if you ask these firms to quantify the number of clients who leave based on price drivers and/or the number of prospects they are locking out due to price, they tend to have little substantive data.

Economists use price elasticity of demand – the measurement of the change in demand of a product based on a change in its price – to measure consumer responsiveness. Wealth firms have industry tools and research at their disposal to quantify price competitiveness and should also be conducting wide range elasticity tests to measure adoption at bespoke price points. Advisors have long used aggressive price discounting strategies to attract and retain clients, yet it’s almost as if some wealth managers prefer to have a muddied price-to-value story. 

Have you ever reviewed a wealth manager’s web site and walked away confused about what they do well and how they differentiate themselves? If so, you’re not alone. Marketing techniques using industry jargon to make a Wealth Manager seem polished tend to read as generic statements and vague promises that highlight product and investment management capabilities but do nothing to highlight unique services aimed to increase investor confidence and reduce anxiety.

Fee structures can be confusing or missing entirely. It can be difficult to find a clearly articulated value proposition centered around the advisory team’s process (the “how”) that will be tailored to investor needs and aligned to a transparent service solution (the “how much”). There are multiple nuanced ways to effectively communicate value, but it often proves difficult for many traditional firms who have long relied on asset-based client segmentation.

Challenges in Asset Based Segmentation

While many firms still offer commission-based products, the traditional standard for Wealth Managers is a fee-based, assets under management (AUM) pricing model, with industry advisory fees still hovering around 1%, on average. Progressive, tiered schedules offer decreased rates as clients accumulate wealth, but the AUM model is more or less a one-size-fits-all concept – the more money a client has, the more they pay in fees.  

The underlying premise with AUM models is that as wealth increases, so does complexity in managing it. This can certainly be true in some cases, but this blanket assumption is inherently false for a large majority of affluent and wealthy households. As an example, consider two household personas:

Can you guess which client would most likely require more time from the Advisor? Why should the retired household pay five times the fee for what ultimately results in less service? While the AUM model offers a frictionless way to charge fees, it turns out to be incredibly expensive for a higher net worth household with simple needs. Further, it’s less than ideal for households that require more upfront planning or ad hoc services.

At the end of the day, clients are effectively punished by bringing more assets to the firm, even though their overall service need may start to decline. What, then, is the answer? It’s not complicated: Align price to the value delivered.

Emerging Hybrid Pricing Trends

Fortunately, there has been a slow industry shift. Modern investment management tools and digital capabilities have significantly decreased the cost to serve clients, with portfolio construction, rebalancing and tax loss harvesting functions being handled through automated platforms. Investors are aware they can get quality investment choices across most firms, so portfolio management returns are no longer the primary barometer for success. Emerging pricing models tend to reflect this shift, with asset management priced as an accommodation and not the core service.

Innovator firms are not dropping the AUM model entirely, but significantly lowering these fees, then supplementing them with planning and service model solutions. They may earn less money on the sub-set of clients that had otherwise been considered extremely profitable, but they are able to optimize revenue by attracting a much larger base of younger clients that will now always be marginally profitable.

The hybrid concept is based on no single ‘best’ method. Rather, a combination of multiple fee structures aligned to client segmentation across needs, preferences, types of service, and breadth of service. Sample emerging fee structures include:

  • A one-time fixed fee to produce or update a financial plan.
  • An ongoing retainer or subscription fee for financial advice or coaching.
  • An hourly or project-based fixed fee (similar to other professions like doctors, attorneys or CPAs).
  • Complexity driven models with levels of service (i.e. Basic, Premium, & Concierge selections).
  • Augmented AUM models based on account performance, household income or net worth.

Small, independent advisory firms are nimble and can adopt new pricing models based on which makes the most sense for their target clients. Larger firms may have more governance challenges, but frontrunners like Charles Schwab and Vanguard have had the courage to innovate in this space, positioning themselves as incredibly attractive service provider options, while also diversifying and reducing risk in their revenue streams. 

The first step, through adequate testing, is understanding the tailored experience your clients want, then supporting Advisors with relevant pricing tools and capabilities. At a minimum, a competitive values-based pricing model that leads with planning and focuses on needs and preferences provides a distinct competitive advantage against those firms simply following the crowd.

More importantly, this approach allows Advisors to spend more time focusing on the follow-through and helping clients articulate and quantify their goals over time. Setting intentions, understanding one’s relationship with money, understanding the “why” behind a goal, then exploring the art of the possible – this is where real value kicks in toward increasing investor confidence.  


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