Why is there fee compression in financial services – Is the value really decreasing?

Fee compression is a trend many are talking about. Rather than reading into the gloom and doom headlines of fee compression, take a step back and look at the VALUE you provide your clients. You see, value is in the eye of the beholder. The problem is, the beholder – your client or prospect – may not know the value you are delivering.

Most of the advisors I have worked with over the years are providing significant value through investment advice, investment selection, planning for the future, retirement income planning, regular guidance, and above-and-beyond service. And when clients and prospects know your value, issues like fee compression can be minimized in your business. So, what’s the catch?

I believe advisors need to message their value more succinctly, more often, and in a more memorable way to clients and prospects. So where can you get started?

Using outside research to prove value According to independent studies by Russell Investments, Envestnet, Vanguard and others, a fiduciary advisory relationship can be expected to add an average 3% per year (see links to these studies at the end of this blog). Most of these research reports are for “Advisor Use Only” however the essence of their conclusions are powerful and should be discussed.

Proving value should be front and center at firms today. What does a client really receive? What are advisors doing for their fee? For instance, many advisors implement Goals-Based Planning (not Performance-Based Investing). But the key to the value of any type of service requires proving it. Is the client really reaching their goals? Are they okay with respect to their goals when the market drops? The “valuable” advisor will measure progress to these goals each quarter and share it with the client (hence reminding and proving value).

In the face of negative media and low-cost providers, if you want to be perceived as having value you have to consistently remind people of the work that is being done on their behalf.

If we don’t lead the conversation, by the time clients start heading for the door, it just may be too late.

Here are the studies:

“Your Advisor… worth nearly 3%,” Russell Investments, 2017.  https://russellinvestments.com/-/media/files/ca/en/financial-professionals/value-of-advisor-client.pdf?la=en-ca

“Capital Sigma: The Return on Advice,” Envestnet, 2016. http://www.envestnet.com/sites/default/files/documents/ENV-WP-CS-0516-FullVersion.pdf

“Vanguard Advisor’s Alpha,” Vanguard Research, 2016. https://www.vanguard.com/pdf/ISGAA.pdf

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