The Key Business Trends In The Advisory Business

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Back in the day when individual investors were buying stocks and bonds instead of packaged solutions like mutual funds and ETFs, there was an investment analyst Mark knew in Seattle who was locally famous for his contrarian bets. His inclination was to look at companies currently out of favor with the investing public; assess their management, their culture, and their market; then take a long view of their business to determine whether it was an opportunity worth owning.

Advisory Business

The stockbrokers who worked for this particular firm adored the man, whom we will call “Conan the Contrarian,” because his reverse approach always made them look good with their clients. Today, whenever we hear some industry pundit spout conventional wisdom, we try to channel Conan. We find it helpful to ask, “What would Conan do?” whenever we see our profession fleeing from or toward an idea.

Among the beliefs most often repeated are:

  • Advisors are reducing their fees.
  • Young employees lack a work ethic.
  • Robos/digital platforms will make it difficult for advisors to compete.
  • The industry will benefit from a huge generational transfer of wealth.

There are many more, of course, but we examine these questions in light of the facts and the reality on the ground. No doubt, our opinions will stir the ire of some but that’s exactly what Conan would do – cause people to challenge convention, then act with the wisdom they’ve gained from the analysis.

Advisors are reducing their fees

While there are a number of advisors who claim to be experiencing some fee compression, we have found that the top-performing advisory firms have actually increased their fees in each bracket of client. Much has been written about fee compression in the industry but we struggle to find signs of such a trend. In fact, in 2010, the yield on AUM (revenue divided by AUM) was 78 basis points, compared to 77 in a 2014 study and 75 in the 2015 study.

It appears those firms most under pressure are the ones whose value proposition is tied to investment performance. There are also some wealth management firms who have had more difficult conversations in the past year with clients who are experiencing percentage returns of less than 5 percent.

Those who have raised their fees claim they have had very little attrition because they have been able to demonstrate value beyond the investing relationship and even beyond the basics of financial planning. They may be giving their clients unique access to private banking or alternative investments, or they are creating a community of clients in which others want to be part.

As we have learned from observing other industries that have been commoditized (for example, coffee, retail grocery, medicine, tax accounting), those who can command a premium are those who can deliver a premium experience and who are perceived to be offering more value.

By Mark Tibergien and Kim Dellarocca, read the full article here.

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