In the wealth management industry, three trends continue to redefine the role of advisors: fee compression, regulatory burden, and digital innovation. While these trends were established in the decade that just passed, they still affect how advisors work with their firms and communicate with clients. Investors are paying attention, too, having had time—particularly during the pandemic—to zoom in on lower-cost investments and cheaper forms of advice. As the advice market evolves, it’s worth separating and exploring these trends, which we’ll do for you in a three-part blog series. Today, we’ll start with the first trend: fee compression.
This trend has had legs since the 2010s due to the increasing number of ways investors can pay for advice and the competition from discount brokerages and robo-advisors. Cost savings have also come from declining fees on investment products (such as mutual funds, ETFs, and SMAs). While the cost of quality financial advice is getting cheaper (good for investors), the technological advances that have, for instance, led to zero-cost trading and robo-advice capabilities are changing the basis of competition for advisors and, in turn, the ways they charge fees for advice. In the minds of some, fee compression leads to profitability compression, thus compelling advisors to rethink their fee models.
To compete on fees and maintain profit levels, advisors must find new ways to demonstrate their value to existing clients and new prospects. Portfolio-allocation services or higher investment returns will no longer be enough for advisors to justify their fees. They will need to provide investors with additional premium advisory services—at scale—to help build out and continue growing their business. But what could that model look like for an advisor from a fee-structure perspective? The solution may be a flexible hybrid-advice approach that accommodates different fee structures and is supported by financial technology.
As the advisor-client relationship evolves, a hybrid-advice model could be an excellent way for advisors to attentively show clients that they understand them, not to mention cope with fee pressures. This model, enabled by a technology-centric managed-money platform, still provides choice in investment products but lets advisors offer different levels of advice to their clients at different fee rates. Fee differentiation is easy to understand and commensurate with the amount of time and guidance provided. For example, an advisor running a hybrid-advice model could have different fee structures for clients who prefer digital-only advice services (robo-advice); another for clients who require comprehensive wealth-management services (traditional, in-person advice); and a third for clients somewhere in between who want to be advisor-assisted but self-serve with digital tools (hybrid-advice). Robo-advised clients are charged a small fee based on a percentage of assets, but they can also pay for ad-hoc personalized advice. Traditionally advised clients are charged sliding-scale fees based on AUM and/or by commissions-based transactions. And the fees that hybrid-advised clients pay are cheaper than in a traditional advice model but more expensive than in a robo-advice model; however, the fee includes some face time with an advisor.
One clear benefit of a hybrid-advice model is that it gives advisors the ability to service investors across all tiers of the wealth spectrum and stretch lower fees to a broader swath of their client base, thus allowing them to take on more clients without sacrificing the quality of advisory services. These clients can stay in or move through various advice offerings depending on the complexity of their needs and their willingness to pay for the advice. Another benefit of a hybrid-advice model is the integration of digital tools, which can free up more time for advisors to focus on developing relationships. From a bottom-line perspective, a hybrid-advice approach will be critical as it allows advisors to build a business that can be scaled. However, this model isn’t just about profitability; it can also deepen an advisor’s relationship with their current clients and attract new ones as clients clearly understand what they’re paying fees for and the value they get from them.
To wrap up, hybrid advice has the potential to become the dominant model of advice delivery. Firms lacking the digital infrastructure to operate a hybrid-service model should consider plugging the gap with a fintech provider. This partnership could be the fastest way to implement an end-to-end hybrid advisory platform or the quickest way to develop modular digital solutions that could be bolted onto a firm’s current system. This set-up should also help the firm and its salesforce stand out and create differentiated yet repeatable client experiences that might otherwise have left them succumbing to the fee-compression trend.
Check back here in a couple of weeks for the next topic in our blog series: regulatory burden. We will unpack it and its impact on an advisory business. If you would like to learn more about what we do, please contact us today.