Even before the deal was confirmed Monday, the reports of Charles Schwab acquiring TD Ameritrade have sent shockwaves among RIAs questioning what the custodial behemoth resulting from this union could mean for their businesses.
With the recent race to zero commissions, RIAs appear to be facing pricing challenges and may be forced to think beyond asset-based pricing.
In an interview conducted prior to the confirmation of the deal, TD Ameritrade Institutional’s director of business performance solutions, Vanessa Oligino, spoke to FA-IQ about how RIAs can navigate these choppy waters, and what common mistakes they should avoid.
Q: Do you think investment management firms now need to sort of review pricing in light of zero commissions?
A: I think that it's really too new to say. I would say that in the absence of value people look at other things. Why do you stay with anybody, any service provider? It’s a combination of price, the experience you have with them, the quality of service — all those things come into play. So, if you continue to show the value you provide, price may become less important. Why do we pay five dollars for coffee at Starbucks? You can get a cup of coffee for two dollars. You pay premium pricing because of the experience and the brand. So, I think there’s a lot of other things that come into play, and not just the pricing aspect.
Q: Between fee compression fears and zero commissions, what are the challenges RIAs face today? Is repricing the way they charge the only way out for them?
A: Every two years we do an annual benchmarking study for advisors, and every two years we ask for information on pricing. We have not seen pricing compression happen yet. Over the past five years or so, we haven’t seen a lot of change. That doesn’t mean they’re not starting to feel it and they’re going to give greater consideration to pricing changes in the future.
But I do think advisors could revisit their pricing strategy more often than they do. So many advisors will go with the asset-based pricing model because it has served advisors very well — it's profitable and really easy to explain.
They do need to think about how they will be able to articulate the value they provide. And the part that goes along with that is that they do need to be adequately compensated for the value that they provide to their clients. So, in some cases, that may mean they need to have a combination of pricing models, or they need to look at specific client segments and say if we’re doing really custom work for ultra-high net worth clients, maybe we have a project fee, for example. If we’re working with another financial professional on a particular thing, like a divorce, that’s above and beyond the typical work you do for your client on an annual basis. And that is something that they could consider.
On the other side, they could consider implementing a minimum fee. So if there's a market downturn and they’re challenged to generate revenue under the asset-based pricing model, they could have a minimum fee in place to make sure they are at least covering their costs.
There’s a lot of different reasons to look at pricing. And we just don’t see advisors doing it enough.
Q: Is there a time frame you think is optimal for advisors to undertake this exercise? And what should they look at when evaluating their pricing structure?
A: I think in general, they should be looking at it every two years or so, unless there is a change in strategy or an event that makes sense to look at pricing as you’re looking to implement that change.
For example, if you decide you’re going to put a lot of effort into prospecting millennial clients and you haven’t done that before, you may need to look at where we are today. Maybe we’re mostly serving boomers. What is our price we charge to millennials? Does it make sense to do it under an asset-based pricing model if they don’t necessarily have the same level of assets that our typical client has? So maybe it makes sense to charge them differently.
Or if you’re looking to add to your service menu: Maybe you’re going to add something like estate planning and now you’re bringing in someone to work at your firm in-house that specializes in estate planning. Well, now you have increased your costs from a human capital perspective, and you’re going to be delivering more value than you had in the past for clients. So, does it make sense in that scenario to increase the price because you’re actually increasing the value that you will deliver?
There’s a lot of different things that go into it. But oftentimes, what we see with firms is that their pricing continues to stay the same and they are continuing to add to the list of services that they provide. And that doesn’t always make sense or work out from a profitability perspective over time.
Q: What are some of the common mistakes you see advisors make while evaluating pricing?
A: The first is they wait too long. Sometimes advisories haven't increased pricing in 20 years. And that’s a tough conversation to have. That’s hard to justify with clients — especially those who are used to a much lower a lower rate.
Another example is where you go through the exercise of defining a new pricing strategy and different pricing levels, and then you don’t stick to it. What ends up happening is we see a lot of discounting on fees. You need to be disciplined about holding it and making sure the advisors are accountable for any fee waivers they issue.
Q: How do you view the subscription pricing model? Especially for RIAs that don't have scale. Can they use it to add value and maintain profitability?
A: I think regardless of pricing model, you first need to figure out what is your cost to service. Not a lot of people take the time to look at that. How much does it cost you to serve a client, given the menu of services you have today, and your expenses and running your business? Once you understand that cost to service, you can see whether it’s under an asset-based pricing model or subscription model, how much revenue you need per client to be profitable. That’s the basis they need to do that exercise. Cost to serve, plus desired profit margin equals the minimum I need to make on each client. Then decide what’s the best way to charge that client.
If you’re an investment management firm, then the asset-based pricing model may be the most suitable for you because you’re really hanging your hat on the performance of an investment under that model. If you are primarily a financial planning firm, and that’s the core value that you hope to provide to clients, a flat fee or advice retainer fee may be more suitable, because you’re saying the value of the financial planning is really what you’re paying for when you work with us.
You can do a mixture of both. You could charge a flat fee for the financial plan and then, if they choose to invest with your firm as well, then there could be an asset-based fee that goes along for the investment management component.
So, there’s a lot of different ways to do it. I think you just need to make sure as a business that you are profitable.
This interview has been edited for clairity and concision.