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When I got started in the business at Morgan Stanley in 1999, it was not uncommon for advisors to charge over 2% advisory fees – especially if they were recommending an institutional money manager. In fact, there was one guy in our office that proudly charged 3% saying he was “worth it.” He wasn’t worth it, I can assure you of that. But he was successful, at least for a while.
25 years later and the industry has experienced margin compression as access to institutional money managers can be had just about anywhere and offered by just about anyone. Competition tends to do that to pricing power.
I meet and speak with a lot of advisors. It seems that many advisors price their advisory services between 0.90% – 1.25% for a $1 million account. Of course there are outliers, but my experience has shown the above range seems to be “the going rate.”
It’s About Value – Not Cost
The fees we charge clients significantly impacts their returns. We are able to charge such a fee because the assumption is that investor wealth can be better off given the planning, education, and guidance in making wise financial decisions. Vanguard Advisor’s Alpha agrees with this, putting the advisor potential value at roughly 3% per year.
If an advisor is charging 1.25% and their potential net impact is a positive 3% per year, how is it that I say they aren’t worth their fee? Because few advisors actually do it! Even fewer advisors know how to “behavioral coach”, which is the greatest value advisors can offer per Vanguard. (I happen to agree with them).
Competition Today, Tomorrow, and The Role of AI
Financial planning tools, which used to be just for financial advisors, can be accessed by anyone. Many firms allow investors to use the financial planning tools at no cost. We know that many people may plan, but few have the time nor dedicate the effort to implementing the plan. So there is still tremendous value in the advisor as a planner and implementor. With the improvements in AI, we can assume that these tools will get even better for investors. What if AI will be able to help investors implement the plan seamlessly for the investor? That would be a threat to the advisor’s planning/implementing value. Get ready for it; it’s coming.
So what will you do to ensure you are worth it, not just today, but in the future? I’ll tell you one thing that can help. Develop greater empathy. Practice it. Connect more personally with clients. AI will kick our butts in providing analysis and even logical guidance to the investor. But AI can’t empathize. A wonderfully worded white paper on behavioral finance doesn’t connect with nor will it influence investor moods, and ultimately behavior. But a listening ear, eyes that demonstrate you get what they are saying, validating their feelings and concerns, and then pivoting to share some helpful perspectives can absolutely change the mood and improve the decision!
Connecting With the Human Investor
Ever since I stumbled across behavioral finance by accident in 2011 as I was writing my master’s thesis (you can access it here), I have been creating behavioral tools and content that helps advisors demonstrate greater empathy and really connect with their human clients. The industry is fraught with tools built for the rational investor. The assumption that investors don’t make cognitive mistakes and aren’t influenced by feelings is central to the development of tools and optimizers we use today. Of course, that doesn’t describe the human investor.
I believe advisors can not only earn their fee, but protect it from margin compression. But it will take effort. It will take foresight into what will change in the future, and what won’t change. The human psyche won’t change. The more advisors get familiar and actually apply psychological principles to their business, the better off they will be for the changes that are coming.
Related: The Choice Is Ours: Listen to the Noise or Tune It Out