Digitization and new technologies are changing the relationship between clients and advisors, but firms will adapt—starting with their pricing strategies.
About this time each year, we pause to reflect on the state of the wealth and asset management industry, critical issues and opportunities the industry will face in the coming 12 months, and how firms can position themselves to the benefit of their clients, their advisors, and the firms themselves.
With an economy barely in recovery mode, continued uncertainty concerning the U.S. government’s future tax policies, and financial markets still struggling to find their direction, individual investors and the firms that manage their wealth have much to be concerned about. This year we would like to use this opportunity to discuss two significant developments in the wealth management industry.
The first is how digitization and new technologies are changing the client–advisor interaction in general and the delivery and content of advice in particular. This shift points toward new investments in enabling technologies and capabilities, at a time when funding for new investments is scarce due to continued pressures on growth and profitability.
The second is price realization. Many wealth management firms have not changed their pricing for individual clients for many years. As the business has become more complex, and firms and advisors are providing more value to clients, it’s appropriate to review pricing strategy and assess whether pricing is fair, appropriate for the value provided, and consistent across the client base. This is particularly true for firms that serve high-net-worth clients. Implemented correctly, better price realization can become a new source of profits, since price increases drop to the bottom line, except for advisor compensation, and therefore can help fund renewed investments.
Regarding the first shift, digitization is dramatically altering the client–advisor interaction. An obvious example is the tablet phenomenon, which shows how a technology can sweep through an industry and alter long-established habits and expectations. For years, people talked about how mobile platforms would change the game. Then came the iPad in 2010, quickly followed by other tablet devices, and the game really did change.
Today, tablets are a dominant factor in the client–advisor world, and a majority of wealthy investors want to use tablets to interact with their advisors. New technologies for authentication will facilitate this development. Together, these technologies create a new environment in which investment ideas, research, and advice on portfolio allocation and rebalancing get delivered to clients in real time and on a continuous basis—rather than through periodic face-to-face interactions.
The very nature of advice itself is also changing. Advice is increasingly becoming a science, not just an art, with algorithms that can calibrate portfolio allocations and generate investment ideas based on client profiles/preferences/risk tolerance and in real time, as financial markets move up and down and asset values fluctuate. Historically, science-based advice was aimed at the lower, less profitable end of the investor spectrum, as a substitute for more expensive, human-based advice. Today, even wealthier clients are increasingly comfortable with science-based advice as a complement to human-based advice.
Social media is also altering the client dynamic. In the past, financial advice was a confidential matter exclusively between a client and his or her advisor. Now, clients increasingly want to know about their peers, how they are investing, and how their strategies have been performing. Or they want to be able to track the strategies of leading asset managers. Or they want a select group of mentors and friends to comment on their investment choices. New social media tools and technologies make such interaction possible.
A number of business models have emerged to leverage these new technologies and deliver this type of advice. For example, Betterment, which has more than 10,000 subscribers, creates a personal allocation recommendation for clients who answer a few questions online about age, savings goals, income, investment time line, and risk profiles. Personal Capital, which won “Best in Show” for financial innovation at FinovateFall 2011, creates a dashboard linking all of a user’s investment accounts and provides an automated analysis of allocations. Covestor allows investors to parallel the strategies of select fund managers.
We are also seeing an increasing use of social media to facilitate affinity groups and share investment ideas, such as Family Bhive, which tiers users by net worth, and Family Office Exchange, a peer-to-peer network for ultra-high-net-worth individuals and their family offices.
While some traditional wealth management companies have started to explore these new ideas and business models, others have held back and are now at risk of losing the battle for differentiation. At Booz & Company, we have assisted several leading wealth firms that have sought to differentiate themselves by improving the client experience and implementing technology-enabled advice. This most often involves new investments, partnering with other firms, and in some cases targeted acquisitions.
Funding these initiatives is another question, however. Gains in advisor productivity and increased differentiation will lead to incremental growth, which can help justify these investments over time. But the second major shift in the sector—increased price realization—can provide a more immediate source of funding.
The wealth management industry has long suffered from heavy discounting of fees. Our experience indicates that high-net-worth clients often pay fees that are 40 to 60 percent lower than their firms’ published fee schedule, with entire portfolios being discounted by 30 to 40 percent. There are good explanations for this pricing predicament: Wealthy investors are adept at negotiating down their fees; meanwhile, performance incentives at wealth management firms often favor asset growth over profitability, which leads to discounting.
What’s more, since the beginning of the financial crisis in late 2007, in the context of poor investment performance and client discontent, the priority at many wealth companies has been to defend their asset base at all costs. This leaves little room for price increases.
But markets and asset values have recovered, and now is an opportune time to take a fresh look at pricing schedules, discounting policies, and other pricing practices. At Booz & Company, we have worked with several leading wealth management firms on their pricing strategies. Based on this experience, we recommend that management teams follow five steps to increase price realization and profitability.
Step 1: Assemble a pricing “fact base,” starting with a detailed inventory of fee gaps between list and realized prices across clients, products, regions, and advisors. The fact base should also include a review of competitors’ fee schedules and discounting practices.
Step 2: Decide the levels of list and realized fees relative to the competition that best reflect and signal your brand and capabilities. For instance, if you offer a differentiated service that is clearly better than that of competitors, why would you price that offering lower than theirs?
Step 3: Set clear goals and develop approaches for repricing existing relationships. For instance, you may want to reprice one group of clients immediately and another one gradually over time, or you may opt to implement these changes one relationship at a time.
Step 4: Establish clear pricing governance and incentives. Governance is essential to drive more consistency in pricing and discounting decisions over time. Incentives must be aligned with the new pricing strategy.
Step 5: Set up a project management office (PMO) to develop a communication plan, train client-facing staff to handle pricing and repricing discussions, arm relationship managers with the right client and account data, track and report incremental revenues net of client/asset attrition, and celebrate early successes to maintain momentum .