A New Approach To Fee Negotiations
March 8, 2016
by Dan Solin
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It’s a rare advisor who has not been confronted with resistance to fees. Indeed, in an article in The Wall Street Journal, Jonathan Clements says that the time has come to end the 1% of AUM fee rate. Recent research reveals a tactic that advisors can use to lower their fees – without sacrificing revenue in the long run.
It’s particularly difficult for advisors recommending actively managed funds to justify their fees since the majority of these funds underperform their benchmark index in any one year. The odds of outperformance decline markedly over the long term.
The prevalence and growing popularity of robo-advisor platforms have added to the fee pressure on traditional advisors. A recent blog posted on Seeking Alpha noted: “Robo-advisors can do an advisor’s work for a lot less in fees, placing heavy new competitive pressure on FAs.”
In this competitive market, prospects are negotiating fees. Faced with the possibility of losing potential income, many advisors find themselves challenged to justify the fees they have historically charged.
A different approach to fee negotiations
A study co-authored by Simon Blanchard and Kurt Carlson of Georgetown University’s McDonough School of Business with Jamie Hyodo of the Smeal College of Business at Pennsylvania State University provides some much-needed insight into how to handle fee negotiations.
Through a series of five experiments, the authors of the study found that pairing a discount with a request for a favor increases the probability of a successful outcome. For example, in one experiment, participants were told to engage in discussions over the price of a coffee table-record player. One group was given an “absolute lowest price” by the seller with no further information. Another group was told the lower price was tied to a promise to post a positive review on a trade website. A third group was told the lower price was conditioned upon recommending the store to a friend.
Participants who were asked for a reciprocal favor (either posting the favorable review or recommending the store) had a significantly higher rate of acceptance than the group that received the lowest price without any such request.