The importance of the right pricing strategy - 02.02.2007
WealthBriefing, Alison Malton, Managing Director, ComPeer Limited
Many Private Bankers will tell you that clients are not price sensitive if you deliver the right service. Yet according to the latest Wealth Briefing Poll, 75% believe that fees are important, with 23% stating that they have to discount to win client business. At ComPeer, we are seeing increased interest from firms wanting to understand how their tariff stacks up against the competition, and looking for assistance in developing their pricing strategies. This all suggests that fees are an increasingly important factor in wealth management.
The way that wealth management services are priced has changed significantly over recent years resulting in pricing structures which are often complex and confusing for the client. In this article, we look at how some of these anomalies have arisen, the current pressures on fees and charges and the key elements of future pricing strategies.
In the UK, the private client traditionally paid for financial services with commission, be that through a stockbroker, investment manager or an IFA.
In the stockbroking sector, post Big Bang, competition started to reduce commission levels and, with the rise of the internet dawned the low cost brokers. Gaining exposure to stock markets on an execution only basis, and particularly with retail access to ETFs, CFDs and financial spreads, has never been cheaper.
Stockbrokers and private client investment managers sought to move clients to discretionary services charged on a fee, or combined fee and commission basis. The argument for fees was that it aligned firm and client’s interests, being based on the performance of the portfolio and reducing any temptation to increase revenue through portfolio churning. The total cost to the client of a directly invested portfolio has however remained broadly flat over the last ten years at an industry average of just under 1% for an average portfolio size of just under £300,000.
The introduction of open architecture and multi-manager propositions are undoubtedly more expensive for the client. Multi-manager offerings of the wealth management divisions of the UK banks are priced between 1.75% and 2%, justifying higher fees by inclusion of asset allocation overlay and best of breed managers. Clients of many wealth managers offering a multi-asset class and open architecture proposition could similarly be paying in excess of 2% once all underlying fees and charges are included.
The other main distribution channel for private client investors in the UK has been the IFA. Whilst still commission based, until the last five years, clients would typically be paying 5% up front commission and 1.5% annual management fee. The internet has again played its part in driving down commissions and the majority of funds can now be accessed with no, or minimal, up front commission through a fund supermarket. The top end of the industry, in part pushed by regulation and in part by a desire to get their own act in order, is belatedly joining the stockbrokers’ move to a more fee based approach.
So, we are seeing convergence towards a fee based approach but with total expense ratios ranging from 1% to over 2%. And often combined with a lack of transparency in total fee levels and what services they cover. It is perhaps not entirely rationale that a more bespoke private client portfolio, maybe including a SIPP or other tax wrapper, should cost less than a standard fund based product. There are those within the industry who will argue that a 2% total expense ratio is not sustainable compared to the risk free rate of return and that fees will need to converge nearer the lower end of the current range or be more clearly linked to wider wealth planning advice. An increasingly sophisticated client is clearly shopping around and looking for an explanation.