Why only 14% of RIAs volunteer complete pricing information to clients and why selective fee disclosure is not a winning strategy

What is the advantage, for any business especially a professional services firm, in publicly disclosing anything to do with firm finances? Since all fees are specific to individual cases – what numbers could even be accurately reported?

Of course, competitors will use this data but it is likely it will be of little value in attracting new business.

Elmer,

So what do you tell prospective clients when they ask you what your fees are? Or does it just never come up in conversation?

Brooke

After the facts are known, a fee for each case is calculated and shared privately. Of course, the client can do what they want with that information. If the facts change, which they always do, the fees change.

Fees are invariably identical, however. If they were not, it would be an early red flag. Pricing is effectively uniform and standardized for basic financial services.

Full disclosure and transparency applies to client information accessibility – not publishing to the general public.

Factually, also, how would an accurate or even representative figure ever be calculated? Theoretically, it may be possible to send out identical fact scenarios and then ask every firm to supply a set of fees – but that would be unworkable. It’s like asking – what is the price of a car?

More demand for customization of services leads to more flexibility in fees. So the point may be moot.

I think you make an important point — that the divulging of prices in this industry follows a script not unlike what happens at the car dealership. I get why it happens in a moon-roofing world but it hardly seems ideal.

Brooke

Right. Hard to imagine how it could be standardized or even reported accurately. Yet, there is increasing research that fees are critical to returns, especially on folks life savings and retirement plan accounts.

Not sure how the problem could even be researched. Ideas welcome.

Mr. Bob Veres recently published a wonderful article on this subject titled “Six Reasons You’re Charging the Wrong Fees” — I found the article particularly informative.

http://advisorperspectives.com/newsletters13/Six_Reasons_Youre_Charging_the_Wrong_Fees.php

We are business development consultants and the problems we see for our clients which include RIAs, TPAs and family offices include:

- Sales pressure forces lower common fee

- Scope creep and increasing service demands

- Inability to charge for additional services and expenses

- Increasing tech demands and costs, again that cannot be shared with clients

- Very little costs accounting

Thus, many firms and family offices end up stuck in a “wasting” economic model where the more they grow and deliver the less money there is available to support the service delivery, business continuity and building of equity. We do M&A work as well.

Where we are allowed to have some pricing input, we find clients are uniformly supportive of paying what the service costs and is worth, often more. But there is a strong psychological resistance to setting fees in a business-like manner. Usually it is reactive and ad hoc.

Transparency is paramount. The same relationship when I analyze money managers. I only complain about mutual fund fees when performance does not justify the expense, same with our clients.

Right, but how is that, very general principal, implemented? It soon becomes multi-dimensional.

Accuracy also seems important but then we have to admit there are multiple scenarios and how are any of them chosen and then generalized? Ideas welcome.

What I really appreciate as a consumer is when somebody says: We have a complex pricing formula but in the case that you buy an ABC package, it would cost you about XYZ.

I just bought a Toyota at a dealership and that’s how they approached it. I liked it. It gave me my bearings.

When somebody tells me they can’t give me any numbers because it’ll confuse me, I am insulted and inconvenienced.

Right, but is the problem with specific fees for a scenarios when the facts are known or for general public statements about fees, or typical fees?

Again, what does a “car” cost? Or house?

I’d say an average sedan costs $24,000 and the average Bay area house costs about $750,000.

What’s so hard about that?

As soon as you start getting specific, at all those numbers change. As the time frame changes so does the fee, e.g., sample size issues.

What then is the error term from the average to specific applications? How many standard deviations?

What kinds of “decision” need to be made from the data point? A law of nature is that “information is expensive” So data that delivers real “information” and is predictive and accurate is expensive to create, find, etc. Same with advisor fees.

Then there is this – so the fee will be based on the client’s feelings not what the services cost/value/etc. !?

“It’s all about relationships. According to PriceWaterhouse Coopers’ 2013 wealth management survey, the traditional pay structure where a fee is tied to assets under management may shift to a more client-centric “reward and incentive structures” model.

“Historically the focus was on net new money but we’re seeing a shift to the client experience, the client’s goals and managing risk,” PwC’s Steven Crosby told Financial-Planning. He said firms are starting to judge wealth managers’ performance based on customer satisfaction.”

Managing money, or other professional services, based on emotions was determined to be a failing strategy centuries ago. BTW, research says patients who “like” their doctors more have worse health outcomes, die earlier, more symptoms, etc.

More from PWC report:

“Traditional approaches to product and service provision are changing.
The emphasis is now on solutions and a shift away from perceived commoditised products to advice. The shift to open architecture will continue and organizations are now focused on rationalization and more specialist products. Greater transparency in pricing and the abolition of retrocessions in some countries is leading to margin pressure. The industry value chain is evolving with greater specialisation and focus on the key determinants of success. As a result, new and innovative competitors today compete alongside traditional industry players.

Understanding the client’s perspective of value is only getting tougher.
Respondents need to understand their clients better. While respondents are clear that many aspects of their client relationships are effective, key demographic trends, (including the rise in importance of Generation Y and of women as specific client segments), now need to be embedded within segmentation techniques, next generation transition management needs to improve and profitability measurement needs to become more sophisticated. Respondents rank themselves as needing to improve in some key areas of client value added, especially in client reporting, digital offerings and provision of broad based advice. The industry needs to become smarter at understanding what clients really value, and in turn how much they will pay for the value added. Private clients tell us that they are currently underwhelmed by how they are communicated with by their wealth managers.”