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New Tool Benchmarks Advisor Wrap Biz Pricing

SuperUser Account posted on September 29, 2010

New Tool Benchmarks Advisor Wrap Biz Pricing
Thursday, April 28, 2011 by Administrator

New Tool Benchmarks Advisor Wrap Biz Pricing

By Tom Stabile September 29, 2010

A new tool is offering financial advisors the ability to benchmark the wrap fee they charge to clients on managed account program assets against thousands of their peers. Toronto-based PriceMetrix is using data from 20,000 advisors in its system to offer technology that can delve into detailed per-account pricing scenarios for the managed account wrap fees over which most advisors have considerable discretion to set.

High-net-worth clients at brokerages usually pay a wrap account fee that covers the advisor’s recommendations and planning, as well as access to the vetted product platforms of separately managed accounts, mutual funds or other product sets. Clients typically pay a fee that ranges from 1% to 2% of assets to cover the advisor’s services, the underlying fees of the investment managers, and sometimes a separate “house” charge from the sponsoring brokerage.

The new product’s main utility is how it can help advisors avoid discounting their advisory fee too much, because many of them will immediately jump to the lowest allowed price point in order to win a wavering client, says Doug Trott, president and CEO of PriceMetrix.

“There are cases where 1.5% or 2% is reasonable for a product,” he adds. “Let’s make sure that [advisors] understand that before they give it away. Most firms give their reps a fairly wide degree of price setting so they can be competitive, but you want them to be fair to themselves and their firms.”

A high percentage of advisors don’t price their accounts optimally, says Rick Rummage, president of the Rummage Group, a recruiting firm, and a former Morgan Stanley advisor and branch manager. “I would say about a third of advisors are very disciplined in their pricing approach,” he says. “They actually have some sort of model that they use to charge for [a certain account size and type] and they don’t stray from it. They don’t discount.”

But other advisors either have a target price but easily cave in to discounting, or have no pricing methodology whatsoever – “they’re all over the place,” Rummage says. “Quite honestly, a lot of them under-price. There are some out there getting 2.25%, but a lot of advisors feel guilty, that they’re gouging the clients if they charge that.”

Trott says the new FeeCheck tool has many dials that advisors can set to check closely against their direct peers – including full low-to-high price ranges, medians and quartile comparisons. But he says they should go into the pricing exercise with a sense of whether they want to be a “premium,” “moderate” or “discount” option on the market. “We show them the market and let them decide where the price is,” he adds.

For now, the tool covers SMA, mutual fund, advisor with discretion, and advisor without discretion advisory programs, says Sarah McFarlane, business analyst at PriceMetrix. The firm is also collecting data on unified managed account programs, but only has a narrow data set for those platforms so far.

McFarlane says the price ranges for the four program types is “shockingly broad,” ranging from under 1% to more than 3%, which makes the benchmarking tool’s ability to drill into detail more valuable. She says SMAs are generally on the higher end of the scale because of the additional investment manager fee built into the price.

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The level of detail includes setting the comparison at advisors with similar production levels and other vital stats – such as membership in the top-seller “Chairman’s Club” – and then pricing for accounts and client portfolios with similar breakdowns between equity, fixed income or cash.

McFarlane cites some of the data the system tallies for the specific case of an advisor without account discretion who produces $1 million in revenue and is seeking price data for a $200,000 account for a client with $1 million in assets in the relationship. The result is a market median price of 1.18%, a top quartile median of 1.35% and a maximum price of 2.14%.

“It lets the [advisor] see the price range for this type of client, this type of product, ‘reps like me,’” Trott says.

Trott says his firm’s analysis finds the typical advisor may be “undercharging” by up to $500 a year per individual account within client portfolios, a number that can add up substantially over the lifecycle of a client relationship.

He says the tool is most useful as a preparatory measure before meeting with a prospective client, but is more accurate than grabbing a number from industry research consultants – who don’t delve into the same level of account-level detail – or by calling around to peers. He says about three-quarters of all advisors offer some level of discount from “list” prices at their brokerages. “But they go to 1% too quickly,” he adds.

There may even be a way to use the technology as a demonstration tool to negotiate with clients who are offering “challenging price resistance,” Trott says. “If the client insists, ‘I can get it for 75 basis points down the street,’ the advisor can say, ‘You can see I’m charging you the median price in the market on that account, and I’m not going to go lower. You can get a lower price but you may be getting the lowest service level, too.’”

The new technology is built on data that PriceMetrix collects for its other price benchmarking tools from 20,000 advisors across 20 brokerage firms – the same firms that are its clients. PriceMetrix’s website lists Morgan Stanley Smith BarneyJanney Montgomery ScottHilliard Lyons and Scott & Stringfellow among its brokerage clients, and mostly caters to full-service shops. Trott says it is starting to target independent brokerages as well.

Trott says the system aggregates and “normalizes” the data for cleaner comparisons, and offers clients the option for their advisors to benchmark within their own brokerage if desired. The system also automatically “rebalances” a pricing schedule if an advisor wants to change the fee for a certain asset type within a client’s larger portfolio.