Business costs are rising, leaving some advisory firms to find subtle ways, such as tiered pricing, of passing these costs on to clients.
For example, U.S. wealth managers — given new compliance standards and client demand for more transparency — will spend $44 billion on technology this year, said the market research firm Aite Group. That is up 5% from 2010, and nearly 11% higher than in 2009. The higher expenses are paring profits at a time when firms are reluctant to propose fee increases to clients spooked by wobbly markets and a slow economic recovery.
Registered investment adviser LJPR LLC in Troy, Mich., knows what it is like to see margins compressed by rising costs. The firm raised fees in 2006 for the first and only time in its 21-year history. "We were very apologetic," said LJPR's managing partner, Leon LaBreque.
Only two of its 400 clients protested. "That taught us that our clients value us; not as a commodity, but as a service provider," LaBreque said.
That said, LJPR now is reluctant to ask clients to pay more, even though it has seen its compliance costs more than double since 2008. Instead the firm, which manages about $400 million for approximately 750 clients, has segmented its client base into separately priced service tiers and introduced a la carte offerings to cover special needs. "We're less tempted to change prices and more tempted to change services," said LaBreque.
Along with lagging profits and other problems of the 2008 financial crisis and after, rising expenses is likely a factor contributing to a drop in the number of independent broker-dealers in recent years. As of February, there were 4,555 brokerages registered with the Financial Industry Regulatory Authority versus 5,005 in 2007 — a 9% decline.
Like LJPR, Windham Capital Management LLC is also careful to keep its private-client fees to a minimum. The investment adviser, of Boston, charges between 50 and 100 basis points on top of 20 or so basis points for the underlying managers, said Mark Kritzman, Windham's president and chief investment officer.
Windham keeps its wealth management prices down by using low-cost index products and by sharing trading, portfolio accounting and reporting tools with a far larger institutional client line of business, Kritzman said.
PriceMetrix, a consulting firm in Toronto, feels advisers are too timid when it comes to pricing. "Firms are better off competing in terms of service than price," Doug Trott, PriceMetrix's CEO, said.
When markets are weak, advisers fall into what Trott called "guilt pricing" that seems to continue well into periods of recovery. PriceMetrix's analysis of stock market moves and adviser behavior after the flash crash of May 2010 found that advisers kept apologizing for the glitch long after buy-sell ratios indicated that investors were over it.
"Clients are more resilient than advisers," Trott said.
