Over the past two years, fees charged by financial advisers to new mid- and large-market defined contribution/401(k) clients have been shrinking at an alarming rate. This decline is driven by a number of factors. As with many other trends, it is likely that deflationary pricing will move downmarket. More than ever, it is essential that advisers clearly define their value proposition to employers and participants who, for the first time, will be able to easily determine what they are paying as a result of the new disclosure regulations - or risk being commoditized competing on fees.
Focused on fees
Though easy to predict, the rate of change for mid- and large-market advisory fees has dropped faster than many expected, with advisers themselves mostly to blame. No question that the focus on costs and the new disclosure regulations have turned the spotlight on fees, two of which, 408(b)(2) and 404(a)(5), are about to come online. And it was predictable that as advisers moved upmarket, serving more savvy buyers competing against institutional consultants, that their fees would decline. But many advisers have been turning employers' attention to fees not only as a way to win new business but as one of their value propositions.
When employers learned that they could save money on record-keeper fees, whose services were painted as a commodity, or as advisers started using more passive funds or ETFs to lower overall expenses, it was inevitable that these employers would eventually turn their attention to advisory fees - especially as the competition grows among experienced DC advisers.
Denial was rampant as advisers believed that their services would be valued differently than record keepers and money managers. But with the growing popularity of auto plans and packaged investment products like target date and other forms of asset allocation funds, advisers are now fighting to show why they should not be viewed as the commodity that they painted the record keepers and active money managers to be.
The pace of price deflation for advisers has been faster than with providers because advisers are not as organized, nor have they mobilized as a group to defend their value proposition. While advisers embraced third-party tools, many of which focus on fees and not value, record keepers have resisted. But the picture is rosier for advisers than for record keepers. Advisers that can show that they are more successful in improving results for participants in their plan, as measured by income replacement ratios, will be able to charge a premium.
After all, it is actually easier to convince the employer to sign up with a more expensive but also more successful adviser if the adviser can prove their success because the participant is paying the bill and the employer can see that they are actually helping their employees.
Very few people shop for a doctor or lawyer primarily on price, especially if they can afford a better one. Advisers are in a better position to show that their services have a greater impact on improving outcomes than providers.
Some employers will not value a more successful adviser, even if they can prove their effectiveness. And some advisers have built a business model around volume and low cost. But for advisers who want to charge a premium the course is clear: pick the right clients and be ready to have solid-proof statements around their claim about improving outcomes for participants. Otherwise, they should be prepared to lower fees and build their business model accordingly.
Reach Barstein, founder and executive director of The Retirement Advisor University, a strategic partner with the UCLA Anderson School of Management Executive Education, at fred.barstein@TRAUniv.com.
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