Viewing RIAs in a new light, Fidelity Institutional shifts from a top-down to a bottom-up emphasis to serve them

We will chime in with further opinions – however, we would prefer to speak from data. It’s very hard to tell with any business model what leads to growth – profitability is internal so easier to measure. There is decent research that being in a growth market or not is all that matters. That makes sense but is unflattering to our beliefs in people and processes mattering.

We respect all the custodians, but without real data and proprietary IP — how can any of the practice management recommendations be judged as valuable? If the custodians are serious, long-term, about this some serious study (not just one) needs to happen. It’s going to take an investment.

Further, business development is a whole different set of skills and expertise from client sales, portfolio management and relationship management. Being good at these three core skills for advisers probably means lead generation (marketing) is not a skill.

All advisors are very good at closing qualified prospects , running and office and customer service. Our experience is most are horrible at business development. But we’re marketers so are horrible at portfolio management!

Most firms don’t even have “cost of sales” as a budget item and custodial consulting ain’t going to move the needle much.

With the web/social media, more financial complexity, hyper-competition, the commodiification of serves and products, compliance and regulations, and the great demands of both referral sources and clients — business development is a full time job x 2. We are doing more videso for clients — that’s a whole other skill set. There is simply no time to do effective business development and the other jobs in a firm.

Plus, as a financial services marketer you really have to know your stuff. You must be an expert in financial services, compliance and the business. Frankly, most marketers stay away from our industry because the compliance scares them. To do FS marketing, not sales — sales is different, you have to be a geek and love compliance complexity. Yes, I said “love” it.

Yes, the custodians, advisors, advisor firms all have a common new AUM goal but what’s missing is pro marketing and marketers. Disclosure – That is self serving to say — but still true.

This is more confirming data from Fidelity that a firm’s pricing power is almost exclusively in their investment delivery alone. Unless “wealth management” firms are extremely disciplined and “stick to their knitting”, delivering on the non-investment components of their offerings tends to systematically erode their operating margins. No surprise here.

Further, “wealth management” firms have almost no pricing visibility (clear, like-kind peer references) and, therefore, little relative pricing power with non-investment services. Worse, clients have been socialized that they can get these services for “free” or at a discount in a bundled fee. Usually, they get what they paid for and, too often, clients are under-served. More sophisticated clients recognize this and demand implicitly favors the “wealth management” model, but “wealth management” firms must demand to be paid and not tiptoe around their pricing as if their non-investment services were a fungible commodity.

Sharper, more disciplined cost accounting and pricing practices can get “wealth management” firms off this low-margin treadmill.

The above comment tracks our experience with clients. If you look at family offices, for example, the business model appears to consistently fail, economically (the data is hard to get) partially because, in a fee for service pricing model, service demands always outstrip pricing.

In fee for service models there are actually incentives to push for more services than paid for. Short-term, the client “wins” by getting more than they pay for, but, long-term it is rent seeking and a wasting strategy. There are also built in disincentives in providers to provide more services.

We see scope creep and these bad incentives in the retirement admin business as well.

However, the asset-based fee model may just hide uneconomic exchanges – although two factors make it powerful: scalability, and behavioral pattern of not challenging implicit fees. Explicit fees appear to clearly be immediately felt as a “loss” while implicit fees are much less so.

Jamie,

Thanks for your authoritative comment and the fresh voice here. I know you
know wealth management.

Brooke

P.S. Thanks for making it a conversation as always, Elmer.