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Beat The Race To The Bottom On Fee Compression

Fee compression is pushing downward, driving costs to unprecedented lows. The price for many financial transactions and services has declined to near zero, and there is no doubt that low-cost investment vehicles continue growing in popularity. Clients benefit as these savings go right back into their portfolios — or straight into their pockets.

But as fees “race to the bottom,” the vast majority of advisors are feeling the pain. More than two-thirds of registered investment advisors and fee-based advisors are concerned about fee compression, according to our most recent Advisor Authority study of more than 1,700 advisor and individual investors nationwide.

In the face of increasing fee compression, the most successful RIAs and fee-based advisors — those who earn more or have more assets under management than their peers — are already a step ahead.

Successful advisors with larger firms will win by leveraging scale to cut costs and create greater efficiencies. Many are poised to gain a competitive edge through acquisitions that will increase their size and scale. They are already re-engineering their current business models to remain viable — from the specialized services they offer to their use of technology to the ways they put clients first. All advisors will need to take a page from the playbook of successful advisors to join in this race — or they will be left behind.


Specialization Helps Beat Fee Compression

As costs continue to hit new lows and competition heats up, successful advisors know you can’t win on performance alone. To justify fees, you need specialized expertise that aligns with your clients’ needs. And to rise above the race to the bottom, Advisor Authority has consistently shown that a top factor for attracting and retaining clients comes from leading with customized offerings.

As experts say, the advisor who tries to serve all clients ends up serving no one. Successful advisors become subject matter experts, developing a unique specialty for serving clients based on their generation, profession or lifestyle. They become the trusted counselor on navigating different stages of life and phases of the market, protecting clients from reacting to emotions during challenging times and keeping them on track with long-term financial plans.


The Fin-Tech Factor 

We operate in a world where digital giants such as Netflix and Amazon have raised the bar for ease, convenience and choice, while keeping costs low and creating greater value. In this world, there is pressure for advisors to meet tech-savvy clients on their terms. Everything now moves at instant internet speed, as more households are “wired,” and as mobile technology becomes near ubiquitous.

The vast majority of RIAs and fee-based advisors say technology will drive more fee compression over the next 12 months. Time and costs have been cut to near zero for transactions such as stock trades, bank transfers and peer-to-peer payments. Asset management continues to become more commoditized with the growing use of robo-advice by an increasing number of investors and advisors — including the most successful.

But technology is a double-edged sword. It’s the cause of fee compression and a solution. Successful advisors use more technology — and invest more in technology — to consolidate disparate data from multiple accounts, customize solutions across a wide range of client needs, and provide more holistic advice, all without additional staff or administrative burdens. They know technology is not an enemy but an ally in the race to refine their practice, enhance investing and advising capabilities, and ultimately serve clients more efficiently — and more profitably — at every point in the relationship.


The Competitive Advantage Of Customer Experience

To beat fee compression, advisors must also create the competitive advantage of a unique customer experience. As Advisor Authority shows, more than 90 percent of successful advisors say that customer experience is vital to their value proposition. They use customer experience as a key to unlock client acquisition, satisfaction and retention. It is fundamental for the growth and health of a profitable practice — and is expected to increase in importance.

The most successful advisors are also more likely to use artificial intelligence to transform every aspect of the customer experience, from the front-end to the back office. They leverage AI to open the door to a new category of client, offer a new universe of products and solutions, and ultimately gain an edge over the competition.

But to make the customer experience work, both advisors and investors say trust is the single most important attribute. They agree that quality of communication and a personal one-on-one relationship are key for success. And although the power of technology will continue to grow, advisors and investors also agree that it is no replacement for the human touch — and nothing can replace face-to-face interactions. Striking the right balance between tech and high touch is more important than ever.


The Fiduciary Factor

While the Department of Labor fiduciary rule was vacated by the courts, Advisor Authority has shown that 84 percent of successful advisors agree that a fiduciary model will benefit their practice, regardless of what happens on the regulatory front.

At the same time, the fiduciary factor is of vital importance to clients. Year over year, Advisor Authority has shown that a fiduciary standard is consistently rated among the top three most important factors influencing an investor to work with an advisor. And as last year’s study shows, nearly half of investors (48 percent) say they would stop working with an advisor who is not required by law to serve in their clients’ best interest.

Today, more advisors and firms are moving toward an independent fee-based service model. Cerulli data shows that across all channels, 78 percent of all advisors are now fee-based, earning more than half their revenue from advisory fees, versus 46 percent in 2003. By 2021, the number of RIAs and other fee-based advisors will grow by another 10 percent, the research firm says, and they will have 20 percent more of the available assets under management.


Rise To The Challenge And Win The Race

Fee compression will inevitably increase and there is no turning back. Innovation will continue to surge at an unprecedented pace, driven by the digital economy, technological innovations, regulatory changes and the power of consumer demand.

You can win by understanding that these trends are not your obstacles but are your allies as fees continue their race to the bottom. Specialize and recognize clients’ demands for customized offerings and holistic planning that puts their best interests first. Retool your practice and make the investments in technology to keep your own costs low as you cut costs for your clients and create the competitive advantage of a unique customer experience. The race is on and there is no turning back. So adapt now — or be left behind.


Craig Hawley is head of Nationwide Advisory Solutions. Craig may be contacted at [email protected]

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