Pershing is urging adviser and wealth management firms to focus on the cost of service delivery and value delivered in addition to benchmarking against market-based and competitor pricing models.
Pershing estimates that only around 20 per cent of firms use the cost of providing services as the foundation for determining price and believes that this must change in order for firms to develop a profitable pricing structure.
In light of the retail distribution review (RDR) reforms many companies are moving to a fee structure based on percentage of assets, but few companies apply a minimum to ensure protection in down markets. When setting fees, advisers must calculate their break-even point—accounting for the hourly rates of each team member, operational expenses and the targeted profit margin. Fees should be reviewed on an annual basis to ensure that any changes in expenses or levels of service provided are reflected in the calculations.
In addition to calculating profitability, advisers must clearly define their optimal client and align their service offering and pricing with their different client segments as part of their long term business planning. The cost of servicing clients will depend on the complexity of their requirements and fees must be tailored accordingly.
Gabriel Garcia, director, Pershing, says: “Achieving sustainable growth and profitability in both strong and more challenging markets requires a fresh look at pricing. UK wealth managers and advisers need to adapt to the post-RDR environment – fees are under pressure and there is competition for the most profitable clients. When establishing a pricing framework it is vital to tailor it to individual clients’ needs and to consider not only your current business model, but more importantly, where you want to be in years to come.
“Tackling a pricing transition can be demanding, and many firms often find discussing fees with clients is an uncomfortable experience. When rolling out any new structure, firms should carefully consider how clients are likely to react, and whether to apply the change to all or future clients only. A thorough transition plan, detailed cost analysis, clear profit targets and communication of the value proposition to clients are all key parts of the process.”