PriceMetrix, offering intelligence solutions for retail brokerages in North America, focused on transactional equity commissions in its study. It found that advisers not only lose money immediately when they cut their fees, but also have lower average returns on assets than other advisers and are unable to reset their prices as quickly when markets recover.
“As we’re seeing once again now, providing good advice to investors during volatile times is one of the most important services an adviser can offer,” noted Doug Trott, President and CEO of PriceMetrix. “Clients pay for the advice and experience of their advisers. They do not expect a discount when market performance is poor, any more than they expect to pay a premium when market performance is strong. As such advisers should be confident charging a fair price in bad times, as well as good times. “
PriceMetrix’ database contains aggregated data on more than three million investors and 15,000 financial advisers. For the purposes of this study, the company looked at seven million equity trades over a three-year period ending in June 2011. PriceMetrix found that the average financial adviser cut his or her fees substantially during the market turmoil of 2008 and 2009. During this period, the average discount on commissions rose from 37% to 43%.
Advisers have subsequently raised their fees with the average ticket size increasing from $224 to $231. On the other hand, price recovery has been fragmented as some advisers have more successfully raised rates than others have. Just 13% charge full price while half of all advisers discount their commissions by at least 30%.
One of the most important, but often overlooked, aspects of an effective pricing strategy is how consistently it is applied, contends PriceMetrix. By a variety of measures, advisers who priced trades consistently over the three-year period ending in 2011 outperformed advisers who did not. Consistent pricers had a higher price to principal ratio of 1.13% compared to 1.04% for inconsistent pricers. They also had a higher average return on assets of 0.76% compared to 0.71%.
"Advisers who price rationally and who demonstrate consistency outperform their peers," noted Trott. "Advisers should consider the value of their advice balanced against the value of the client relationship when they discount. Any revenue they may lose by offering a discount, they should get back, either through a referral to a new client or a greater share of the client's wallet."
PriceMetrix also found that advisers who raised their commissions over the past three years actually improved their businesses and experienced less client attrition than advisers who did not raise their prices. While advisers as a whole reduced their average client load over the period, the data show that advisers who raised their prices by 25% or more lost fewer clients than other advisers with a decline of 6.1% versus 9.4%. Further, average production increased 12% for the group that raised prices, compared to 9% for advisers who did not raise their fees. Advisers who raised prices saw a 10% growth in the number of households generating $2500 or more in revenue, compared to a 6% for other advisers.
PriceMetrix has found that advisers choose a particular price for a transaction for a number of reasons: what they believe the 'right' price is; rounding up or down to make a price easier to communicate; discounting to a price they believe clients are willing to pay or aligning price to compensation grid levels. Overall, the most popular pricing behavior is to price a trade at a flat fee, a round number like $100 or $150. The most popular price for a trade is $100.
PriceMetrix believes that investment firms can help their advisers improve their pricing strategies by developing new price schedules, which are fair, clear, and rational. Firms should also work with their advisers to help them apply the new schedules. For example, firms can establish minimum ticket sizes or rewards good pricing practices. These steps can go a long way towards establishing and maintaining suitable pricing behavior among advisers.
PriceMetrix’ equity commission pricing study can be accessed at www.pricemetrix.com/insights