tips for client segmentation

The longest ever bull run and the move to fee-based business models has helped increase advisory assets in recent years. The bad news? Fee-based advisors earn less in a down market — just when they’re probably providing more services. To reverse this negative effect in the months ahead, advisors must be deliberate about building their books and retaining existing clients.

Since 2015 in North America, revenue per advisor has grown 5% per year, reaching $717,000 at the end of 2019, says the latest advisory report by PriceMetrix, published this month. The Toronto-based firm is owned by U.S. management consultancy McKinsey & Co.

Fee-based business models helped contribute to that rising trend, with fee-based revenue contributing 69% of overall gross production for advisors, up from 49% in 2015, the report said.

Yet, the obvious drawback of a fee-based model is that you’re paid less during a market downturn, when you’re probably offering more to clients, such as research and communication.

Finding ways to build your book, despite social distancing, will be key to offset revenue losses. While fee-based advisors may have had less incentive to take on new clients during a decade of positive market performance, advisors who focus on adding new clients outperform their peers during market downturns, according to previously published PriceMetrix data.

The current report found that advisors opened 7.5 new client relationships last year — the same number they opened in 2016.

To help boost that number, advisors can capitalize on money in motion, which is typically found during downturns. In 2009, 10% of clients left their advisors — the highest level of the last 12 years, the report said. The figure also highlights the importance of serving existing clients well during a crisis.

The report offered tips to assess your services, such as considering how clients’ needs have changed and how to respond, identifying things to stop doing, extending services to those whose needs are ignored, managing younger demographics through marketing and service delivery, and considering digital services.

No more falling fees?

As advisors seek out new clients and serve existing ones during this recession, they may be tempted to lower fees. But advisors may not recover from such a move.

During and after the financial crisis, 17% of advisors moved to lower pricing, the report said. When prices eventually stabilized, they recovered only half what they gave up.

While that result was a transaction pricing phenomenon, today’s increased proportion of fee-based advisors will earn back lost revenue as the market recovers, the report said.

It also identified a levelling off of fee compression.

A drop in fees has been a challenge in recent years, with annual fees for new accounts hitting 1.01% in 2019, from 1.07% in 2015, the report said (for households with invested assets of $1 million to $1.5 million).

However, 2019’s figure of 1.01% has essentially flattened since 2017.

“Pricing on all (new plus existing) accounts continues to decline, but the stability in new account pricing suggests that the two will converge sooner rather than later,” the report said.

For full details, read the PriceMetrix report.

About the report: PriceMetrix collected data from more than 25 wealth-management firms in North America, using client holdings and transaction information from 65,000 advisors.