As inflation continues to impact the lives of Americans, price increases continue to impact the purchasing power of their incomes and assets. Company after company has raised their prices when they believe the increases will make them more sustainable or preserve their profitability.
There is one noteworthy exception. Financial advisors charge their clients asset-based fees for planning and investment services. Advisors, who charge these types of fees, are receiving less money for their time and knowledge.
There is a certain amount of irony due to this financial advisor marketing conundrum. Many advisors work harder in down markets than they do in rising markets. For example, the time they commit to nurturing current clients through tough times increases substantially during significant stock market declines.
It is also true that asset-based fee schedules still dominate the way advisors are compensated for their advice and services. They receive pay increases during rising markets and experience pay cuts during declining markets.
So, a high percentage of financial advisors experience a double whammy during these market conditions: Rising operating costs due to high inflation and declining revenues due to falling securities market values.
The question for this article is, what should they do about it?
Financial Advisors Market Sliding Schedules Of Fees
Recent studies show the median asset-based fee that financial advisors market starts at 1%. This fee usually applies to the first one to three million dollars of assets for individual investors. Then the fee declines to .75% on the next few million dollars and 0.5% afterward.
On a positive note, a declining fee schedule encourages investors to place more money with a financial advisor. On a more negative note, some more astute investors question the advisor's cost of managing a three-million-dollar portfolio versus a one-million-dollar portfolio. Bigger portfolios are very profitable for advisors because there is little or no additional expense - perhaps a few additional positions when assets are larger. The higher fee is virtually all profit.
If this is your reality, it is better not to rock the boat during market declines and wait for the markets to recover.
Marketing Financial Advisor Fees During Volatile Markets
On the one hand, financial advisors and their clients are experiencing a 40-year high in the rate of inflation, and you already know the stock market typically declines during periods of higher inflation due to its impact on the revenues and earnings of public companies.
When the stock market increases, advisors compensated with asset-based fees get a pay raise. In good years, they get substantial raises. On the other hand, in down years, financial advisors share the pain with their clients when they experience pay cuts.
Raising fees on current clients during down markets is a bad idea. This would be tough to market when clients are already experiencing a decline in the market value of their assets. These may be unrealized losses, but a decline in value is still a visible decline.
Pay raises in rising markets and pay cuts in declining markets may be the reality for the 90% of advisors who rely on asset-based fees.
Marketing higher fees to new clients may work if the advisors' higher fees are still realistically competitive.
Most Financial Advisors Market The 99% Ratio
How does a 1% fee and a one million dollar increase in market value impact one of your best clients?
In this example, your fee goes up $10,000, and your net worth goes up $990,000. This is the 99:1 ratio that applies to a sliding fee schedule that impacts all or most of your clients.
Then there is the marketing argument that you and your clients are sitting on the same side of the table during rising and falling markets. You and the client make more in rising markets and lose in falling markets due to this ratio.
Market conditions impact you and your clients, but the ratio benefits investors because markets increase more than they go down. The main point here is the disproportionate impact of the ratio.
Most Financial Advisors Market The "Hang In There" Strategy
Experienced advisors are preparing their clients for bear markets during bull markets. They know the markets inevitably go up and down based on the performance of various economic indicators that impact the growth and earnings of companies.
Unless you believe you can time the tops and bottoms of markets, you know your clients are better off staying invested for the long term. However, asset allocations may change based on market outlooks.
This does not mean you leave all your client's assets in the stock market. You should move a percentage of their assets to alternative investments - income-producing real estate, precious metals, or investments that reduce the principal risk during down stock markets.
Is There An Alternative Pricing Model For Marketing The Services Of Financial Advisors?
A small percentage of advisors charge hourly, fixed, and subscription-based fees for their advice and services. These models may apply more to planning services than investment services.
These pricing models are typically based on the value of units of time versus the value of advisor services. For example, the advisor wants to earn $250 per hour for their knowledge and time.
Advisors who charge hourly or fixed fees could make a case for raising these fees when inflation is driving up their business costs.
Why Are Cash Equivalents A Challenging Marketing Alternative?
It is difficult to justify raising asset-based fees when higher percentages of clients' assets may be invested in cash equivalents. Even though these investments are used to protect the principal, clients are already experiencing negative real rates of return based on high inflation rates. Furthermore, higher expenses for managing cash equivalents lower investors' net returns.
Inflation and expenses are the two main sources of erosion for investors.
Why Are Volatile Markets The Best Time To Acquire New Clients?
There is more money in motion during volatile markets than in more stable rising markets when the returns are mostly positive.
For example, more investors are unhappy with their current advisors' results and are seeking replacements. Or, investors managing their own assets (DIYs) realize they need help.
Contrast that with up markets when a very high percentage of advisors are producing positive returns, including the DIYs. They are not inclined to make changes when their assets generate positive rates of return.
This is a tougher market condition for adding new clients.
Conclusion
If you charge asset-based fees, you will give back some of the increases you benefitted from during the most recent bull market. However, this market condition also creates an exceptional opportunity for pursuing organic growth. Consider this: The web is your best marketing strategy for reaching investors who are seeking replacement advisors or their first financial advisors.
