Executive Summary
The times when the markets deal losses to clients are always difficult and stressful, but the difficulties are often exacerbated when clients realize that under most pricing structures, the planner will still be paid even when the portfolios are not up. To be fair, this is often quite reasonably justified by a great deal of value that the planner brings to the table above-and-beyond just portfolio management, and in the typical AUM structure market losses do still mean at least a decrease in the amount of fees that the client pays. On the other hand, because planning fees may already be declining in the face of a bear market, the last thing most planning practices can afford is to lose a client completely; reduced fees are still better than no fees at all. As a result, sometimes planning firms may do whatever they think is necessary to retain a client... including changing their pricing structure on the fly, and offering to reduce their clients' fees to help maintain client retention. But in the end, was the pricing change simply a retention strategy... or are planners actually expressing "guilt" about client losses by trying to make them up with lower pricing?
The inspiration for today's blog post was an article that ran in last week's Investment News publication entitled "Advisors Not Charging Enough: Study" that discussed a recently released new study by PriceMetrix. The results of the study indicated not only that clients may be far less price sensitive than advisors realize - in other words, advisors may be leaving money on the table because clients care more about value than about raw price-shopping comparisons - but also noted that many planners have reduced pricing in recent years, a phenomenon they suggested might be a result of "guilt pricing" with clients.
The basic idea of guilt pricing is relatively straightforward - the client expresses anxiety about portfolio performance results and costs, and in response the advisor offers to lower the client's fees in light of the adverse performance. In some cases it might be a short-term pricing accommodation, but the PriceMetrix results suggest a wider spread phenomenon of overall fee reductions from a subset of advisors - in other words, advisors might not just be giving clients a discount on the current quarter's or year's worth of fees, but instead appear to be adjusting their entire fee schedule lower.
From a business perspective, the study appropriately points out that this can be damaging to the long-term viability of the business. Fees may be reduced temporarily in a downturn, but a lower fee schedule results in a permanently reduced level of fee income. And although many point out how incredibly profitable financial planning practices are in general - implying that there's "room" to cut the fee structure - there were certainly a lot of planning practices who didn't look so profitable back in late 2008 and early 2009. The business may be profitable in bull market years, but if the fee structure is low enough, a profitable business in up years can be a bankrupt business in a bear market.
However, what caught my eye about this aspect of the study was not just the business implications, but the idea that advisor fee changes might have as much to do with the advisor's "guilt" about losses and trying to make it up to the client, as it is a basic client retention strategy to lower fees to keep the client. After all, as the study itself appears to show, clients are not actually as fee and price sensitive as we perhaps think they are; instead, it seems to be more about clients judging the value that they derive from the price that they pay. As a result, many of the higher price - and ostensibly higher services/value - firms actually have the best growth rates.
So if clients aren't actually all that fee sensitive, why are many planners so quick and willing to reduce fees for unhappy clients? Are we feeling guilt about the difficult financial times our clients are going through - and perhaps feeling some culpability because the portfolio declined "on our watch" - and cutting fees in response? Alternatively, perhaps advisor fee cuts are not a matter of "guilt" pricing, but might still be a matter of the planner overreacting to the client's anxiety; in other words, maybe we're misinterpreting a client venting frustration about portfolio losses as a reason to cut the client's fees, and in the end simply giving up revenue for no reason. Yet as noted earlier, if this is done systematically with too many clients over time, it could ultimately put the business itself at risk in the next bear market (when fee revenue declines again, but this time from a lower fee schedule).
So what do you think? Have you ever lowered your clients' fees? Did you do it in a bull market or a bear market? Reflecting back, what were your motivations? Was it about client retention? Do you still think it was necessary to retain those clients, looking back? Have you ever felt personal guilt about a client's financial losses and the impact it has on their lives? Please share in the comments below... anonymously, if you're more comfortable that way!
Financial planners need to be clear to clients and themselves what they are charging for. They are not being paid to make a portfolio go up. No one can do that but those who claim they can are fund managers and “look after” billions, not millions. They also sometimes charge performance fees, helping themselves to a Princely share of a rising market. They should feel guilty in a bear market and return some of their charges but we know they don’t.
What advisers charge their clients for is constructing and maintaining a portfolio that reflects their clients’ needs, attitude to risk, tolerance of losses and so on. They do that through rising and falling markets and that’s why they charge in the same way through both.
It’s only natural to feel that pang of “guilt” in the face of a client’s emotional reaction to losses but remind yourself what you are and aren’t paid for!